Trading Equity Derivatives Tuesday, 9 April 2013 Presenter: Shaun van den Berg : Head of Client Education at PSG Online : Head of Client Education at PSG.

Trading Equity Derivatives Trading Equity Derivatives

Tuesday, 9 April 2013Tuesday, 9 April 2013

Presenter: Shaun van den BergPresenter: Shaun van den Berg

: Head of Client Education at PSG Online: Head of Client Education at PSG Online

• Introduction to Equity Derivatives– Terminology– Examples of Long & Short trades

• 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

• Summary

• Conclusion

AgendaAgenda

Presenter: Shaun van den Berg

• Equity Derivative - Derives its value on underlying share e.g. ANG, BIL, SOL

• Top 100 JSE listed shares• “Go Long” – Rising prices • “Go Short” – Falling prices• “Long Only” – No Scrip available for shorting • Initial Margin – ± 15% deposit • 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. • Gearing or Leverage – Borrowing funds

– For each cent the share moves in your favour, you are multiplying the profits by up to 10 times.

– Gearing magnifies your returns.

Terminology Terminology

• Open a position – Long position – Buying– Short position - Selling

• Close a position – Do the opposite trade– Sell if you hold a long position – Buy if you hold a short position

• Roll a position (SSF)– The automatic closing & re-opening – Next dated expiry contract – Same underlying instrument.

Terminology Terminology

Investor / Trader MatrixInvestor / Trader Matrix

PrudentPrudentHigh Reward / Low RiskHigh Reward / Low Risk

SpeculativeSpeculativeLow Reward / High Risk Low Reward / High Risk

AggressiveAggressiveHigh Reward / High RiskHigh Reward / High Risk

ConservativeConservativeLow Reward / Low RiskLow Reward / Low Risk

REWARD

HighHigh

LowLow HighHigh

LowLow

RISK

Example of a Long TradeExample of a Long Trade

Instrument: CFD & SSFInstrument: CFD & SSFDirection: Buy / LongDirection: Buy / Long

Entry: 28620cEntry: 28620cTake Profit: 31000cTake Profit: 31000cStop loss:Stop loss: 27700c 27700c

Risk/ Reward: 1:2.58 Risk/ Reward: 1:2.58

Potential Profit:Potential Profit:2380c per share2380c per share8.31% (55.40%)8.31% (55.40%)

*15.00% Initial Margin

R100 000 CapitalR100 000 Capital2% Risk Capital = R20002% Risk Capital = R2000

Stop loss = 920cStop loss = 920c= R2000/ 920c= R2000/ 920c

Position size = 217 sharesPosition size = 217 shares2 SSF contracts2 SSF contracts



Stoploss Triggered @ Stoploss Triggered @ 27700cps 27700cps

920 cps loss 920 cps loss - 3.21% (-21%)*- 3.21% (-21%)*


Instrument: CFD & SSFInstrument: CFD & SSFDirection: Buy / LongDirection: Buy / Long


Potential Risk:Potential Risk:500c per share500c per sharePotential Profit:Potential Profit:1600c per share1600c per share

Risk/ Reward: 1:3.2 Risk/ Reward: 1:3.2 4.21% (28.06%)*4.21% (28.06%)*






Example of a Short TradeExample of a Short Trade

Instrument: SSF onlyInstrument: SSF onlyDirection: Sell / ShortDirection: Sell / Short


Risk/ Reward: 1:2.50 Risk/ Reward: 1:2.50

Potential Profit:Potential Profit:1500c per share1500c per share7.77% (92.59%)*7.77% (92.59%)*

*R1620 Initial Margin





Revised TPRevised TPClosed @ 18520cClosed @ 18520c

780cps780cps4.04% (48.14%)*4.04% (48.14%)*

2013/04/032013/04/03Low @ 18135cLow @ 18135c

1165c per share1165c per share6.03% (71.91%)*6.03% (71.91%)*



Instrument: SSF onlyInstrument: SSF onlyDirection: Sell / ShortDirection: Sell / Short


Potential Risk:Potential Risk:630c per share630c per sharePotential Profit:Potential Profit:1627c per share1627c per share

Risk/ Reward: 1:2.58 Risk/ Reward: 1:2.58 3.29% (42.36%)*3.29% (42.36%)*




Position size = 317.46 Position size = 317.46 shares (CFD)shares (CFD)

3 SSF contracts3 SSF contracts


2013/04/092013/04/09Low @ 48577cLow @ 48577c768c per share768c per share1.55% (10.33%)1.55% (10.33%)

• Watch List (Top 100 shares) / Fundamentals– Top 40 shares / Mid cap shares– Mining & Resources / Financials / Industrials

• Technical Analysis– Price charts (Candlesticks) / 50 & 200-day Moving Average– Trend lines / Support & Resistance / Fibonacci retracement levels– Chart Patterns– Stochastic & RSI indicators

• Trading platform– Mobility (Trade anywhere) / Place orders after hours– Direct Market Access (DMA) / Price Alerts & Stop Orders

• Risk & Money Management – Stoploss – Position Size

Trading ToolsTrading Tools

Single Stock Futures (SSFs)Single Stock Futures (SSFs)


• Regulated by the JSE

• A standardised contract – Standard quantity (100 shares)

• Expiry Date – Expires on the third Thursday of every quarter

• March, June, September & December.

• Initial Margin – ± 15% deposit

• Gearing ± 6 times• Variation Margin – Adverse price movement

Equity SSFEquity SSF


SSF Contracts AvailableSSF Contracts Available

• Brokerage - Charged at 0.4% (ex VAT) - 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 – You pay only for the opening leg of all transactions

– Only once per day per SSF contract.

– If you buy a Sasol SSF10 times on one day; you only pay R60 once.

• Rollover Cost – 0.25% of Exposure• Interest Payable

– Interest paid on the SSF cost value

– Determined daily by the market maker

– Ruling SAFEX rates.

• Interest Received – Initial Margin – SAFEX less 2%

– Cash balances - Rate linked to the JSE Trustees rate

Trading CostsTrading Costs


Comparable to EquitiesComparable to Equities

INVESTOR A (Share Trader)INVESTOR A (Share Trader) INVESTOR B (SSFs Trader)INVESTOR B (SSFs Trader)

Confident that Sasol shares Confident that Sasol shares will increase.will increase.

Confident that Sasol shares Confident that Sasol shares will increase.will increase.

She has R35 000 She has R35 000 which she can invest.which she can invest.

Sasol’s share price is R350,Sasol’s share price is R350,therefore she buys 100 shares.therefore she buys 100 shares.

3 months later the price has 3 months later the price has increased by 10% increased by 10%

so she sells her shares to so she sells her shares to make a make a R3 500 profitR3 500 profit. .

Her Her returnreturn on her on her investment is investment is 10%.10%.

The The initial margininitial margin set by the set by the broker is broker is R6 000R6 000 which which

is paid by the buyer.is paid by the buyer.

Sasol’s share price is R350,Sasol’s share price is R350,therefore she buys 1 contract.therefore she buys 1 contract.

After 3 months the price has After 3 months the price has increased by 10% & the investor increased by 10% & the investor

closes out his closes out his position & sells out of theposition & sells out of the

Sasol SSF contract.Sasol SSF contract.

His His profit is R3 500profit is R3 500 but his return on his but his return on his investment is investment is 58%.58%.

• Events initiated by a listed company - Affects share price. • Typically agreed upon by board & authorised by the shareholders. • Processed onto SSF contracts by the JSE (SAFEX) • Owners of SSF positions will not be prejudiced by movements in

the underlying instruments. • Examples include:

– Name changes - No direct financial impact on shareholders. – Rights Issues– Unbundling or Spin-offs– Mergers & Acquisitions– Consolidations = R1 share consolidated 1: 10 = R10– Share splits – Indirect impact - Increased liquidity - Price rises.

• R100 share split 10:1 = R10

– Dividends – Have direct financial impact on the shareholders.

Corporate ActionsCorporate Actions


• Dividends Expected 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.

Dividend Neutral Contracts Dividend Neutral Contracts

• Long Trades – N-contract = R100– Q-contract = R95 plus

interest– Plus F-Contract = R5

• Short Trades – N-contract = R100– Q-contract = R95 plus

interest– Less F-Contract = R5

DividendDividendR5R5

SSF Price SSF Price R95R95

SSF Trading PlatformSSF Trading Platform

New Order (Margin)New Order (Margin)

Step 1:Step 1:Click Click New New

OrderOrder

Step 2:Step 2:Enter Enter

Code & Code & GoGo

New Order (SSF)New Order (SSF)

Step 4:Step 4:Select Select SideSide


ContractsContracts


Price in Price in centscents

Step 3:Step 3:Select Select OrderOrder

Step 7:Step 7:Click Click

SubmitSubmit

Price Watch & Stop OrderPrice Watch & Stop Order

Step 1:Click New

Order

Step 2:Step 2:Select Select Price Price WatchWatch

Step 3:Step 3:Above Above

or or BelowBelow

Step 4:Step 4:Enter Enter PricePrice

Step 5:Step 5:Select Select CloseClose


ContractsContracts

Step 7:Step 7:Enter Enter Price Price


SubmitSubmit

Note: SSF Price Watch & Stop OrderNote: 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.


Hedging using SSFHedging using SSF

Equity PositionEquity Position+ 500 NPN+ 500 NPN

SSF PositionSSF Position-5 NPN contracts-5 NPN contracts

Share Price: Share Price: -R50-R50

Share Price:Share Price:-R50-R50

Loss:Loss:500 x R50 500 x R50 = -R25 000= -R25 000

Profit:Profit:500 x R50500 x R50

= +R25 000= +R25 000

• Capital Efficient• Low trading costs• Hedge your current

portfolio• Trading Platform

– DMA– After hours– Stops

Pro’s & Con’s of Trading SSFsPro’s & Con’s of Trading SSFs

Advantages Disadvantages

• Interest Payable• Quarterly Rolling Fee• Dividend Neutral• Gearing & Risk • No voting rights


Trading Index Futures (ALSI & ALMI)Trading Index Futures (ALSI & ALMI)


• ALSI futures are a futures contract based on the Top 40 index• 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 R29 250).

• Profits or Losses - Depends on where you exit the trade based on the R10 per point value.

• Expiry Date – No rollover (Closeout)

ALSI Index FutureALSI Index Future

ALSI Index FutureALSI Index Future

±200 Points

• 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 or R2 925. • R5 (including VAT) is charged per ALMI contract traded. • No booking fee• Expiry Date – No rollover (Closeout)

ALMI Index FutureALMI Index Future


• 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

• Regulated by the JSE– Counter party risk

Summary: SSFSummary: SSF


Contracts for Difference (CFD)Contracts for Difference (CFD)


• 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

What are CFDs?What are CFDs?


• You do not have to pay the full price of the underlying shares.

• You only pay enough money to cover the initial margin or deposit into your account.

• You may only need R15 000 to purchase CFDs up to a value of R100 000.

• If your position rises to R115 000 (15% rise), you will in fact make a 100% return on your trade, as you only deposited R15 000 initially.

Geared ProductGeared Product

CFD versus Equities (Margin)CFD versus Equities (Margin)

CFD Trade CFD Trade Equity TradeEquity TradeDetails Details

InstrumentInstrument

ExposureExposure

Price (Cents)Price (Cents)

Initial Margin 15%Initial Margin 15%

500 ABC shares500 ABC shares 500 ABC shares500 ABC shares

6000c6000c 6000c6000c

R30 000R30 000 R30 000R30 000

R4 500R4 500

R5 250R5 250Initial Margin 17.5%Initial Margin 17.5% R30 000R30 000

R30 000R30 000


• 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 – R4375 (17.5%) initial margin for Top 41-100 shares.

• Brokerage – Commission is 0.4% (excluding VAT). – Open to negotiate brokerage rates for 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 7.00% (± Prime –2%)

Trading CostsTrading Costs

CFD versus Equities (Costs)CFD versus Equities (Costs)

CFD Trade CFD Trade Equity TradeEquity TradeDetails Details

InstrumentInstrument

ExposureExposure

Brokerage CostBrokerage Cost

STT & STRATESTT & STRATE

Price (Cents)Price (Cents)

% of Exposure % of Exposure

Total CostsTotal Costs

14% VAT14% VAT

500 ABC shares500 ABC shares 500 ABC shares500 ABC shares

6000c6000c 6000c6000c

R30 000R30 000 R30 000R30 000

NoneNone

R120.00R120.00

R85.92R85.92

R37.45R37.45R16.80R16.80

R136.80R136.80 R390.87R390.87

0.46%0.46% 1.30%1.30%

R267.50R267.50


• Regulated by JSE/FSB• Exchanged traded product• Expiry Date= Rollover costs• Set principle amount• Interest agreed upfront• Wholesale interest rates• Best execution• Free markets• Transparent• Guaranteed by SAFCOM• No dividend paid/received• Can take physical delivery

Comparison between SSFs &CFDsComparison between SSFs &CFDs

SSF CFD

• Unregulated• Trades OTC• No Expiry Date• Principle amount could change• Interest fluctuates daily• Retail interest rates• No best execution obligation• Captive markets• Opaque• Not guaranteed by SAFCOM• Manufactured dividends• Never physical delivered

Source: www.jse.co.zaPresenter: Shaun van den Berg

CFD Trading PlatformCFD Trading Platform

CFD AvailableCFD Available

New Order (Margin)New Order (Margin)

Step 1:Step 1:Click Click New New

OrderOrder


Code & Code & GoGo

New OrderNew Order

Step 4:Step 4:Select Select SideSide


QuantityQuantity


Price in Price in centscents

Step 3:Step 3:Select Select OrderOrder


SubmitSubmit

• Buy 300 AVI shares @ 5529c• Exposure = R16 587.00• Initial Margin Required =

– 17.5% x R 16 587 = R2 902.72• Gearing = 5.71 times

– R16 587 / R2 902.72• Brokerage = R16 587 x 0.4% = R66.34

– Equity trade = 0.9% = R149.28 (Minimum R98)• 14% VAT = R9.28 = Total R75.62• Interest on Cost: SAFEX rate 4.73% +2% = 6.73%

– R16 587 x 6.73% = R1116.30 /365= R3.05 per day• Interest on Initial Margin: SAFEX 4.73%-2% = 2.73%

– R2902.72 x 2.73% p.a. = R79.24 / 365 = 0.21 cents per day.

Trading CFDTrading CFD

Price Watch & Stop OrderPrice Watch & Stop Order

Step 1:Click New

Order

Step 2:Step 2:Select Select Price Price WatchWatch

Step 3:Step 3:Above Above

or or BelowBelow

Step 4:Step 4:Enter Enter PricePrice

Step 5:Step 5:Select Select CloseClose


ContractsContracts

Step 7:Step 7:Enter Enter Price Price


SubmitSubmit

Note: CFD Price Watch & Stop OrderNote: 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.


• 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– After hours

– Stops

Pro’s & Con’s of Trading CFDsPro’s & Con’s of Trading CFDs

Advantages Disadvantages• High minimum trade

values• Scrip lending fees• Gearing & Risk • No voting rights


• Review the PowerPoint presentation• Read info available on PSG Online website

• Geared positions - Capital Efficient / More affordable

• Open SSF & CFD account (R1-Million) • Getting Started: Trading Equity Derivatives

– Do your homework (Product knowledge)– Paper trade– Start small – Gain confidence

• Remember: Risk & Money management– Control emotions…

Summary & ConclusionSummary & Conclusion


Finally ….Finally ….

Source: http://business-fundas.com/2010/how-do-stock-markets-work/

Thank [email protected]

(011) 996 5254

Contact Us

Trading Equity Derivatives Tuesday, 9 April 2013 Presenter: Shaun van den Berg : Head of Client Education at PSG Online : Head of Client Education at PSG.

Documents

c risk reward

c potential risk

c stop loss

c position size

risk capital

position ssf

position long position

share risk reward