Looking ahead to the fourth quarter of 2024, we strongly recommend investors to focus on the Financial Options Put Bull Spread Portfolio, Gold Options Bear Spread Portfolio, Iron Ore Options Bear Spread Portfolio, and Index Enhancement Strategies.
1. Financial options put bull spread combination
Logical points: 1) The Fed opens a window for interest rate cuts to provide space for domestic monetary policy. On September 24, the Information Office of the State Council held a press conference, focusing on announcing more than 10 major policies, including RRR and interest rate cuts, to support the stock market. 2) The implied volatility of 50ETF options is at an all-time high, and the options are overpriced.
The fundamentals in the third quarter were weak, and the stock index fluctuated lower as a whole, but on September 19, the Federal Reserve announced an interest rate cut, and the stock index strengthened.
As of September 20, the implied volatility of 50ETF options was 13.59% and the historical volatility was 10.52%, which was slightly higher than the historical volatility. It is expected that the downside of the underlying is limited, and the financial options are slightly more priced, which is suitable for building a put portfolio.
Based on fundamentals and volatility, investors can pay attention to the put bull spread combination of ETF options, sell put options at the same time, and buy put options with lower strike prices to avoid the risks below. In actual trading, the strike price of the put option should be adjusted according to the change of the underlying price, and when the ETF price rises, the strike price of the put option should be moved up to ensure the profitability of the portfolio. The bearish bull spread portfolio maturity profit and loss chart looks like this:
2. Gold options are put bull spread combinations
Logical points: 1) The Fed started the interest rate cut cycle, and the Fed's September FOMC meeting interest rate decision was announced, cutting interest rates by 50 basis points. The Information Office of the State Council held a press conference on the morning of September 24, announcing that it would cut the reserve requirement ratio by 0.5 percentage points. In the fourth quarter, global currencies tended to ease, supporting gold prices. 2) Gold options volatility is at historically high levels, and options pricing is high.
The Federal Reserve started a cycle of interest rate cuts, and the Federal Reserve's September FOMC meeting interest rate decision was announced, cutting interest rates by 50 basis points, and the federal benchmark interest rate was reduced from 5.25%-5.50% to 4.75%-5.00%. The State Council Information Office held a press conference on the morning of 24 September, announcing that it would lower the reserve requirement ratio by 0.5 percentage points to provide long-term liquidity to the financial market by about 1 trillion yuan. In the fourth quarter, global currencies tended to ease, supporting gold prices. As of September 20, the implied volatility of gold options was 15%, and the historical volatility was 9.82%. Volatility is between the historical 60%-70% quantile, indicating that options are overpriced. It is more suitable for building put portfolios. The following chart shows the volatility chart of gold options:
Based on gold fundamentals and volatility, it is recommended that investors pay attention to the bearish bull spread combination of gold options. The portfolio has limited returns and limited risks. The maximum return is the option premium charged when building the strategy, which is the difference between the premium of the put option with the higher strike price and the premium of the put option with the lower strike price. The maximum loss is the difference between the exercise price of the two options and the premium received. When the price of gold does not fall, the portfolio can obtain income, but the return is low, so in actual trading, the exercise price of the put option should be adjusted according to the change of the underlying price, and when the price of gold rises, the strike price of the put option of the strategy is moved up to ensure the profitability of the portfolio. The bearish bull spread portfolio maturity profit and loss chart looks like this:
3. Iron ore options are put on bear spread combinations
Logical point: the fundamentals of iron ore in the medium and long term remain unchanged. There are still many non-mainstream shipments, and the current price has not significantly reduced the production of high-cost non-mainstream mines, and the production capacity has not been cleared, and the price trend may be weak.
At present, the fundamentals of iron ore in the medium and long term remain unchanged. There are still many non-mainstream shipments, and the current price has not significantly reduced the production of high-cost non-mainstream mines, and the production capacity has not been cleared, and the price trend may be weak. Under the short-term improved fundamentals and macro benefits, iron ore prices are expected to rebound in the short term, but the fundamentals of the medium and long-term bearish remain unchanged.
Based on iron ore fundamentals, investors are recommended to pay attention to the bearish spread combination of iron ore options. Iron ore options bear market spread combination refers to selling a put option with a lower strike price and buying a put option with a higher strike price at the same time, which has limited returns and limited risks. Therefore, if the price of iron ore rebounds more in the short term, the losses faced by investors will be limited, and similarly, if the price of iron ore falls as expected, the gains for investors will also be limited. The bearish bear spread portfolio profit and loss to maturity chart looks like this:
4. Index enhancement strategy
Logical point: The central bank, the State Administration of Financial Regulation, and the China Securities Regulatory Commission issued favorable policies to provide support for the rise of the stock market, and the index enhancement strategy is easy to obtain directional returns. The implied volatility of financial options is high, and the potential return from selling options is high.
Fundamentals: The added value of industrial enterprises above designated size increased by 4.5% year-on-year in August, the total retail sales of consumer goods increased by 2.1% year-on-year, China's fixed asset investment increased by 3.4% year-on-year from January to August, and the national surveyed urban unemployment rate in August was 5.3%, and the domestic economy as a whole maintained a weak growth trend. The Fed has opened a window for interest rate cuts to provide room for domestic monetary policy. On September 24, the Information Office of the State Council held a press conference, focusing on announcing more than 10 major policies, including RRR and interest rate cuts, to support the stock market.
Option volatility: At the end of September, the implied volatility of financial options was lower than the historical volatility, and as of September 26, the implied volatility of 50ETF options was 27.06%, which was above the historical 90% quantile, and the options were priced high.
Focus on the Index Enhancement Strategy. In the fourth quarter, the central bank, the State Administration of Financial Supervision and the China Securities Regulatory Commission issued favorable policies to provide support for the rise of the stock market, and the index enhancement strategy is easy to obtain directional returns. The implied volatility of financial options is high, and the potential return from selling options is high.
Limited opportunities for financial options time value strategies. In the fourth quarter, the market is likely to maintain an upward volatility trend, and the risk of selling options strategies is higher. The underlying price fluctuates frequently during the day, which may cause the risk control cost of the put option strategy to be higher.
Options volatility arbitrage strategies have limited opportunities. The difference between the implied volatility and historical volatility of financial options has converged, the market has maintained a volatile bottoming trend, the market is flat, the option arbitrage opportunities have decreased, and the profit margin has declined. Arbitrage strategies may still face a low-yield dilemma.
Tail risk management strategies have limited opportunities. Favorable policies provide support for the rise of the stock market, while the valuation of the stock index is at a low level, which still has buying value, and the space below the stock index is limited, and the tail risk management strategy is difficult to obtain benefits, and the strategy loses the time value cost.
Investment consulting business qualification: Zheng Jian Xu Xu [2011] No. 1290
Author: Zhou Xiaoshu, options analyst of South China Research Institute Z0014889; Assistant analyst Jie Ting F03114103 Lu Zhiming F03124116
Important Disclaimer: The content and opinions in this report are for learning and reference only and do not constitute any investment advice. The market is risky, and investors need to be cautious.