Calendar Spread Recommendation

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					Calendar Spread Recommendation
                                                                                                     www.incomegenerationstrategy.com

Oil Search Limited (OSH.ASX) Calendar Spread
Explanation                                                                investment of 25 cents this is at May expiry. OSH would have to
                                                                           increase above $15.00 (170%) and stay there until May expiry for
Calendar Spreads are an options strategy involving two options with
                                                                           maximum loss to be incurred.
different expiration months. One option is sold for the short term
and one bought for the long term. Although both legs of a calendar         The maximum loss on the downside is greater as you are selling
spread lose value with time decay, the value of the short dated sold       at-the-money put options and buying out-of-the-money put options.
option is eroded far quicker. Traders benefit from this time decay         The share price would have to fall below $2.00 (62%) but there is
differential creating a relatively neutral market outlook.                 potentially a risk of the 25 cent spread and 50 cent investment and
                                                                           there maximum risk is $0.75 There should be a number of chances
Our aim when using calendar spreads is to generate income by
                                                                           to continually sell puts to lower to entry cost/maximum loss.
re-selling the short dated position several times over to not only
reduce the cost of the bought position to $0.00 but to generate an
                                                                           Break Even
income for the life of the bought position.
                                                                           The breakevens are below $4.60 and above $6.40 at May 2009 expiry;
Calendar spreads can be exited early if the trade finishes relatively
                                                                           this is an estimate only as it can not be calculated accurately. This is
close to the sold strike as this will result in the short term maximum
                                                                           a $1.80 range the trade will be profitable at expiry. Please see below
profit. To exit we simply sell the bought position for its residual
                                                                           chart with these breakevens showing how far away they are.
value. This value can be estimated by looking at the payoff diagram
below.
                                                                           Time Decay

Trade                                                                      Time decay is beneficial to the calendar spread by eroding the value
                                                                           of the short dated sold positions whilst having very little effect on
Sell at the money puts with a short expiration
                                                                           the long dated options.
Buy out of the money puts with a longer expiration date
                                                                           Summary
April volatility is extremely low which is not preferable for the Income
Calendar Spread Strategy. However volatility in May options is             Max Risk: Downside $750.00 per contract
unusually high. As a result we have been able to design the below
                                                                           Max Profit: Approx 70% at May expiry
May OSH trade at a very cheap price:
                                                                           Profit Range: Approx between $4.60 and $6.40
Sell 5 OSHF87 May 2009 525 Put 46 cents

Buy 5 OSHK47 Mar 2010 500 Put 96 cents                                     Risks
This trade will cost 50 cents. This is a total cost before brokerage       The risks involved in trading calendar spreads is if the stock falls or
of $500 per contract.                                                      rallies outside of the break even points in the payoff diagram below.
                                                                           If this occurs, we are able to resurrect the trade by rolling the entire
Maximum Profit                                                             trade up or down accordingly. In this scenario the break even points
                                                                           are also moved up or down. Generally we are able to roll the entire
The ideal result is for the share price to slightly increase to $5.25 at
                                                                           trade up or down for around a breakeven.
expiry on 29th May 2009. The maximum profit can not be calculated
exactly with calendar spreads; however the graph below shows an            Volatility drops are also a risk to the calendar spread strategy, If
approximation maximum return over 70% on initial investment is             volatility falls to far both the bought and the sold positions fall in
possible for May expiry. If this calendar spread is held for the year      value significantly. This also makes it difficult to re-sell short dated
returns can be much larger than 70% as we will look to continually         positions for a later month. To continue generating profits, we can
sell put options against the position.                                     sell an extra month out on the short dated position to generate a
                                                                           bigger yield. For example selling 8 weeks out instead of 4.
Maximum Loss
                                                                           Calendar spreads would be considered a relatively low risk, market
The maximum loss if the share price increases too far is the initial       neutral options strategy.



                                           TRICOM ADVISOR - 1300 736 622
                                     STUART MCCLURE
              stuart.mcclure@tricom.com.au www.incomegenerationstrategy.com
Calendar Spread Recommendation
Payoff Diagram




Share Chart




 This publication has been issued by Tricom. Tricom believes that the information contained in this report has been obtained from sources that are accurate.
 Except to the extent that liability cannot be excluded, Tricom accepts no liability for any loss or damage caused by any error in or omission from this report.
 This document contains general advice, which has been prepared without taking into account any person’s objectives, financial situation or needs, so before
 acting on it, consider its appropriateness to your circumstances. Prior to making any investment decision, you should seek professional financial and taxation
 advice. an investment in the above strategy involves risk. Past performance is not a reliable indicator of future performance.


                                              TRICOM ADVISOR - 1300 736 622
                                     STUART MCCLURE
              stuart.mcclure@tricom.com.au www.incomegenerationstrategy.com