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Trading Equity Derivatives Webinar

Trading Equity Derivatives Webinar. Shaun van den Berg Head of Client Education Wednesday, 2 nd October 2013 13h00 until 14h00. Agenda. Introduction to Equity Derivatives Terminology Single Stock Futures (SSF) Equity SSF List of SSF contracts available Index Futures (ALSI & ALMI)

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Trading Equity Derivatives Webinar

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  1. Trading Equity Derivatives Webinar Shaun van den Berg Head of Client Education Wednesday, 2nd October 2013 13h00 until 14h00

  2. Agenda • Introduction to Equity Derivatives • Terminology • Single Stock Futures (SSF) • Equity SSF • List of SSF contracts available • Index Futures (ALSI & ALMI) • Contracts for Difference (CFD) • What are CFDs? • List of CFD available • Examples of Long & Short trades • Summary & Conclusion Presenter: Shaun van den Berg

  3. Introduction to Equity Derivatives Terminology Presenter: Shaun van den Berg

  4. Terminology • Equity Derivative - Derives its value on underlying share (e.g. SOL, AGL) • Top 100 JSE listed shares (Top 40 Large Caps & Next 60 Mid Caps) • Trade a Direction • “Go Long” – Rising prices • “Go Short” – Falling prices • “Long Only” – No Scrip available for shorting • Initial Margin – ± 15% deposit • Gearing or Leverage – Borrowing funds (15% deposit to have 100% exposure) • For each cent the share moves in your favour – Multiply by up to 10 times. • Gearing magnifies your profits / returns. • Variation Margin – Unrealised profits & losses • Processed daily - Mark-to-Market (M-t-M) • Cash account negative – Margin Call • You must deposit variation margin / close out the contract. Presenter: Shaun van den Berg

  5. Terminology • Open a position • Opening a Long position – Buying (Rising prices) • Opening a Short position – Selling (Falling prices) • Closing a position – Do the opposite trade • Sell if you hold a long position • Buy if you hold a short position • Rolling a position (Equity SSF) • The automatic closing & re-opening • Next dated expiry contract • Same underlying instrument Presenter: Shaun van den Berg

  6. Single Stock Futures (SSFs) What are Single Stock Futures (SSF)? Comparable to Equities Trading Costs Dividend Neutral Contracts Hedging using SSF SSF Trading Platform Pro’s & Con’s of Trading SSFs Presenter: Shaun van den Berg

  7. What are Single Stock Futures (SSF)? • Regulated by the JSE • A standardised contract • Standard quantity (100 shares) • Derivative - Derives its value on underlying share e.g. ANG, BIL, SOL • Top 100 JSE listed shares • Expires on the third Thursday of every quarter: • March, June, September & December. • Initial Margin – ± 15% deposit • Gearing ± 6 times • Variation Margin – Adverse price movement Presenter: Shaun van den Berg

  8. Comparable to Equities INVESTOR B (SSFs Trader) INVESTOR A (Share Trader) Confident that Sasol shares will increase. Confident that Sasol shares will increase. She has R48 000 which she can invest. Sasol’s share price is R480,therefore he buys 1 contract. Sasol’s share price is R480,therefore she buys 100 shares. The initial margin set by the broker is R5 478 which is paid by the buyer. (8.76 gearing) 3 months later the price has increased by 10% so she sells her shares to make a R4800 profit. After 3 months the price has increased by 10% & the trader closes out his position & sells out of theSasol SSF contract. Her return on her investment is 10%. His profit is R4 800but his return on his investment is 87.62% (R4800/R5478) Presenter: Shaun van den Berg

  9. Trading Costs • Brokerage - Charged at 0.4% (excluding VAT) of the value of the transaction. • Market Makers Fee – Charged at 0.1% (excluding VAT). • The total brokerage charge is 0.57% (including VAT). • Booking Fee - R60 is charged per SSF contract when a new position is opened per day • You pay only for the opening leg of all transactions • Only once per day per SSF. • If you buy a Sasol SSF 10 times on one day; you will only pay the R60 once. • Interest Payable - Interest paid on the SSFcost value - determined daily by the market maker - ruling SAFEX rates. • Interest Received – Interest will be paid on cash balances in your SSF trading account at a rate linked to the JSE Trustees rate. Presenter: Shaun van den Berg

  10. Dividend Neutral Contracts • DividendsExpected in any quarter • Priced into SSFs • Includes expected interest to be received on dividend payment. • Traders do not receive dividends as a cash payment even though they do benefit from them. • Short Trades • N-contract = R100 • Q-contract = R95 plus interest • Less F-Contract = R5 Paid out • Long Trades • N-contract = R100 • Q-contract = R95 plus interest • Plus F-Contract = R5 Received Dividend R5 SSF Price R95 Presenter: Shaun van den Berg

  11. Dividend Neutral Contracts Presenter: Shaun van den Berg

  12. Hedging using SSF: Naspers (NPN) R200 Presenter: Shaun van den Berg

  13. Hedging using SSF Equity Position + 500 NPN SSF Position -5 NPN contracts Share Price: -R200 Share Price: -R200 Loss: 500 x R200 = -R100 000 Profit: 500 x R200 = +R100 000 Presenter: Shaun van den Berg

  14. Pro’s & Con’s of Trading SSFs Advantages Disadvantages • Interest Payable • Quarterly Rolling Fee • Dividend Neutral • No voting rights • Gearing & Risk • Capital Efficient • Low trading costs • Hedge your current portfolio • Trading Platform • DMA • After hours • Stops Presenter: Shaun van den Berg

  15. Single Stock Futures (SSFs) • SSF Contracts available • SSF Trading Platform • Holdings • Placing a New Order • Placing a Price Watch & Stop Order Presenter: Shaun van den Berg

  16. SSF Contracts Available Presenter: Shaun van den Berg

  17. SSF Trading Platform Presenter: Shaun van den Berg

  18. SSF Trade: Old Mutual (OMN) Stop @ 3100c Entry @ 3035c Target Price @ 2800c

  19. New Order (Margin) (Old Mutual) (OML) Step 1: Click New Order Step 2: Enter Code & Go 2x100x3035c= R6070 exposure R390 x 2 = R780 margin = 7.78 gearing Presenter: Shaun van den Berg

  20. New Order (SSF) Step 3: Select Order Step 4: Select Side Step 6: Enter Price in cents Step 5: Enter Contracts Step 7: Click Submit Presenter: Shaun van den Berg

  21. Price Watch & Stop Order Step 1: Click New Order Step 2: Select Price Watch & Stop Order Step 4: Enter Price Step 3: Above or Below Step 8: Click Submit Step 7: Enter Price Step 6: Enter Contracts Step 5: Select Close Presenter: Shaun van den Berg

  22. Note: SSF Price Watch & Stop Order • The Price Watch AND the Stop Order have to be used together to execute a trade. • Otherwise, a Price Alert just sends an email or SMS to you. • The order will reflect in your order book (on the web) but only enter the trading order book (JSE) when the trigger price is reached. Presenter: Shaun van den Berg

  23. Trading Index Futures (ALSI & ALMI) Presenter: Shaun van den Berg

  24. ALSI Index Future • ALSI futures are a futures contract based on the Top 40 index • Trade a Direction • Go Long - Buy the index & Sell later (Make money as prices rise). • Go Short - Sell the index & Buy back later (Falling prices). • High liquidity – Very popular • Cheap – R25 (including VAT) per ALSI index futures contract traded. • No booking fee. • Tight spreads – The difference between bids & offers are narrow. • Every index point is worth R10 (100 point move = R1 000 profit or loss) • Initial Margin • Trade at the index price • Pay an initial margin as set per SAFEX plus the PSG Online variation margin (currently R33 075) • Profits or Losses - Depends on where you exit trade based on the R10 per point value. • Expiry Date – No rollover (Closeout) Presenter: Shaun van den Berg

  25. ALMI Index Future • Mini version of the ALSI futures (10%) • Liquidity – Improving • Spreads - Improving • Market Maker - As there is a market maker this index will track the ALSI futures. • Every index point is worth R1 • Initial Margin required is a tenth of the ALSI futures margin = R3 307 • R5 (including VAT) is charged per ALMI contract traded. • No booking fee • Expiry Date – No rollover (Closeout) Presenter: Shaun van den Berg

  26. Trading Index Futures (ALSI & ALMI)

  27. ALSI Index Future ±200 Points Presenter: Shaun van den Berg

  28. Trading Index Futures (Central Order Book) Step 1: Click New Order Step 2: Click Order Book Trades Presenter: Shaun van den Berg

  29. Trading Index Futures (ALSI & ALMI) Step 3: Select Drop Down

  30. Trading Index Futures (ALSI)

  31. Trading Index Futures (ALMI)

  32. Trading Index Futures (Holdings)

  33. Summary: SSF • Trading SSFs offers a new dimension • Long & Short trades • Hedge & Speculate • Gearing – Attractive to small trader • Equity SSF - Swing trader • Top 100 shares - Minimum outlay & cost • ALSI Index futures - Serious day trader • ALMI Index future – Stepping stone • Regulated by the JSE • Counter party risk Presenter: Shaun van den Berg

  34. Trading Equity Derivatives - Contracts for Difference (CFD) What are CFDs? Trading Costs CFD versus Equities Trading CFD Pro’s & Con’s of Trading CFDs Presenter: Shaun van den Berg

  35. What are CFDs? • Contracts for difference (CFDs) are contracts … • Two parties (i.e. client & PSG Online) • Settled at the close of the contract • Difference between opening & closing price. • Derivative - It derives its value on an underlying share e.g. ANG, BIL, SOL • “Go Long & Short” – Up or down • “Long Only” – No Scrip available for shorting • Top 100 JSE listed shares • Initial Margin • 15% on Top 40 • 17.5% on next 60 • Variation Margin – “Top-up” - Adverse price movement Presenter: Shaun van den Berg

  36. Trading Costs • Minimum Cost Value - Each new CFD position opened needs to have a minimum cost value of R25 000 • R3 750 (15%) initial margin on a Top 40 shares • R4 375 (17.5%) initial margin for Top 41-100 shares. • Variation Margin - “Top-up” - Adverse price movement • Brokerage – Commission is 0.4% (excluding VAT). • Open to negotiate brokerage rates for large, active traders. • Interest – Interest is charged on the total value of the open position at SAFEX +2%. • This is usually equal to around Prime -2%. • Scrip Lending Fee • A fee of 1.5% per annum is charged for short positions • Charged per day on open positions • Minimum of R250 per position. • Financing at competitive rates (CFD) • Current borrowing rate 6.50% (± Prime –2%) Presenter: Shaun van den Berg

  37. CFD Trading Costs • Buy 1000 Old Mutual (OML) shares @ 3042c • Exposure = R30 420.00 • Initial Margin Required = 15% x R30 420.00 = R4 563.00 • Gearing = 6.67 times = R30 420 / R4 563 • Brokerage = R30 420.00 x 0.4% = R121.68 • Equity trade = 0.9% x R25 000 = R225.00/ 0.85% x R5 420 = R45.07 = R270.07 (Minimum R98) • VAT = R121.68 x 14%= R17.04 = Total R138.72 • Interest on Cost: SAFEX rate 4.73% +2% = 6.73% • R30 420.00 x 6.73% = R2 047.27 /365= R5.61 per day • Interest on Initial Margin: SAFEX 4.73%-2% = 2.73% • R4 563.00 x 2.73% p.a. = R124.57 / 365 = 0.34 cents per day. Presenter: Shaun van den Berg

  38. CFD versus Equities Equity Trade Details CFD Trade 500 ABC shares 500 ABC shares Instrument 6000c 6000c Price (Cents) R30 000 R30 000 Exposure Initial Margin 15% R30 000 R4 500 Initial Margin 17.5% R5 250 R30 000 R120.00 R267.50 Brokerage Cost 14% VAT R37.45 R16.80 STT & STRATE None R85.92 Total Costs R136.80 R390.87 % of Exposure 0.46% 1.30% Presenter: Shaun van den Berg

  39. Comparison between SSFs &CFDs CFD SSF • Regulated by JSE/FSB • Exchanged traded product • Expiry Date= Rollover costs • Set principle amount • Interest agreed upfront • Wholesale interest rates • Guaranteed by SAFCOM • No dividend paid/received • Can take physical delivery • Unregulated • Trades OTC • No Expiry Date • Principle amount could change • Interest fluctuates daily • Retail interest rates • Not guaranteed by SAFCOM • Manufactured dividends • Never physical delivered Source: www.jse.co.za Presenter: Shaun van den Berg

  40. CFD Available Presenter: Shaun van den Berg

  41. CFD Trading Platform Presenter: Shaun van den Berg

  42. CFD Trade: Old Mutual (OML)

  43. New Order (Margin) Step 1: Click New Order Step 2: Enter Code & Go Presenter: Shaun van den Berg

  44. New Order Step 3: Select Order Step 4: Select Side Step 6: Enter Price in cents Step 5: Enter Quantity Step 7: Click Submit Presenter: Shaun van den Berg

  45. Price Watch & Stop Order Step 1: Click New Order Step 2: Select Price Watch & Stop Order Step 4: Enter Price Step 3: Above or Below Step 6: Enter Contracts Step 7: Enter Price Step 8: Click Submit Step 5: Select Close Presenter: Shaun van den Berg

  46. Note: CFD Price Watch & Stop Order • The Price Watch AND the Stop Order have to be used together to execute a trade. • Otherwise, a Price Alert just sends an email or SMS to you. • The order will reflect in your order book (on the web) but only enter the trading order book (JSE) when the trigger price is reached. Presenter: Shaun van den Berg

  47. Pro’s & Con’s of Trading CFDs Advantages Disadvantages • Capital Efficient • No fixed quantities (R25 000) • Low trading costs • No expiry date • No rollover costs • Save the annual 1% expense • Ideal for the Position Trader. • Hedge your current portfolio? • All the benefits • Capital growth / Dividend income • Trading Platform • DMA / After hours • Stops • High minimum trade values • Scrip lending fees • Gearing & Risk • No voting rights Presenter: Shaun van den Berg

  48. Trading Equity Derivatives Examples of Long Trades Examples of Short Trades Presenter: Shaun van den Berg

  49. Example of a Long Trade (ACP) (20130826) Instrument: CFD & SSF Direction: Buy / Long Entry: 4160c Take Profit: 4624c Stop loss:4000c Risk/ Reward: 1:2.34 Potential Profit: 464c per share 11.15% (63.71%) R100 000 Capital 2% Risk Capital = R2000 Stop loss = 920c = R2000/ 920c Position size = 217 shares 2 SSF contracts *17.5% Initial Margin / R708 per contract Presenter: Shaun van den Berg

  50. Example of a Long Trade (ACP) (20130925) Revised Take Profit: 4470c per share (4624c) 7.45% (11.15%)

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