Income Report / Income Report; Portfolio moves & some options education (PPT)

By Market Matters 18 April 18

Income Report; Portfolio moves & some options education (PPT)

Market Matters Income Report 18th April 2018

US stocks had a strong session overnight led by the technology sector while the Australian market is still chopping around the 5850 level on the ASX 200 with weakness in the heavyweight banks overshadowing some good buying in the commodity stocks. Rio Tinto is threatening to break above $80 after a strong quarterly production report.

Sectors today

In terms of the MM income Portfolio, the portfolio fell 0.52% this week, while the index was off just -0.26%. The larger fall was mainly due to the fall in Perpetual discussed in Monday’s report here. It was a busy week of trades for the portfolio (relatively speaking). A small profit was taken on Woodside, while we added to the Perpetual position into weakness. Our cash position remains low, which we are comfortable with given our short term market view and exposure to more defensive hybrid securities  , however we remain keen to sell equities  into strength.


We added to the Income Portfolios’ position in Perpetual (PPT) yesterday into recent weakness around $41, as a clear value play. As we’ve suggested in the past, fund managers are leveraged plays on the market benefiting from both performance and funds inflow during good times, while the opposite is true during the bad times. As this juncture, PPT has had a weak few quarters of FUM flow combined with weakness in asset prices and performance. This has led to a big rout in the share price – with the position in the MM Income Portfolio showing a paper loss of 6.52% at the close yesterday. The original position was taken at good levels, a quick run up in prices ensued however in more recent times the stock has been weak.

Below in an interesting screen which highlights valuation metrics relative to their 5 year averages. Once in the last years PPT has traded ‘cheaper’ on 13x, however at 13.7x based on recently downgraded assumptions, this is cheap on historical metrics. The other aspects we use in term of valuation are also showing ‘value’ – about 20% cheap across the board.

Valuation Metrics


Looking relative to other sector plays, it’s also cheap, however the integrated model that Perpetual runs, like AMP is clearly on the nose. This has become a high risk stock, not for the faint hearted however we do see clear value.

Metrics relative to peers

Perpetual (PPT) Chart


The opportunity was short lived in the Hybrid market in the last few weeks with prices snapping back quickly. The recent Westpac note (WBCPH) issued at 3.20% over the bank bill rate had a low of $95.40 and now trades at $98.50. The CBA hybrid which was added to the MM Income Portfolio after being issued on a margin of 3.40% over, (CBAPG) had a low of $96.76 and now trades at $99.29. Short term concerns in a market like this can often become overblown.

Using Options to generate additional income

While we only write about options sporadically in Market Matters , and in very general terms, I’ve long held the opinion that options depending on how they are used and dependent on who uses them can add some flexibility to a portfolio and increase the overall income, albeit by increasing the risk.  

Below we have outlined two examples of options strategies I have used over the years. The XJO Income Strategy is the primary strategy we use through our Managed Portfolio Service within Shaw and Partners (this is a wholesale product)

The XJO Income Strangle

The strangle strategy sells both puts and calls to generate income, often against the index over a portfolio. The idea is that at least one of either the put or call will expire worthless as the underlying asset cannot be priced at two different levels, while the investor receives income. In essence, the strategy is to sell volatility or ‘insurance’ against a large move in the underlying. The position can be skewed to favour a particular direction in the market.

In this example, the S&P200 (XJO) is trading at 5850.

Sell 10* XJO Jun18 5550 Puts @ $0.30   = $3,000

Sell 10 XJO 6150 Jun18 Calls @ $0.15    = $1,500

Total income received = $4,500

Scenario 1 – the Index closes between 5550 and 6150

The investor receives $4,500 profit as income and a new strangle can be opened.

Scenario 2 – the index climbs above 6150

In this case, the call position is “in the money” and thus the investor will have to settle the option in cash. For each point above 6150, the option is owed $10 ($10 x $10 contracts = $100). The breakeven here is below 6195, as the income received is greater than the amount the call option is owed.

Scenario 3 – the index falls below 5550

Similar to scenario 2, in this case the put position is “in the money” and the options is owed $10 for each point below this level (or $10 x 10 contracts = $100 for this example). The breakeven here is above 5505 as the income received would be greater than the amount the put option is owed.


*index options contain 1000 units per contract. Figures quoted before fees

The Buy Write Strategy

Also known as selling covered calls, the Buy & Write strategy seeks to earn income over a security by selling calls. The investor earns income from selling the call, which reduces the downside to the stock, but limits the upside available on the stock over the life of the option.

Using BHP, buy 1000 BHP at $30 = $30,000 debit

Sell 10* BHP July 18 $32 Call $0.50 = $500 credit

Effectively, the investor now has a purchase price of BHP of $29.50, paying $30 for each share, but receiving $0.50 as income for the option.

Scenario 1 – BHP remains flat until the option expires

The option expires worthless and the investor keeps the $0.50 received and now has the ability to sell BHP for $30, sell another option to receive further income or hold the shares.  

Scenario 2 – BHP falls

Similarly to the first scenario, the option has expired worthless and the investor keeps the $0.50 received, however now the value of the shares have fallen – remember breakeven for the position is $29.50.

Scenario 3 – BHP Rises

If BHP was to appreciate but stay below $32, the option will once again expire worthless. If the price of BHP is above $32 dollars at the time of expiry, the shares will be sold at $32 with the investor realizing the maximum $2.50 gain over the time period. Any price above $32 and the profit is the same.


*there are 100 shares of exposure per standard option contracts. Figures quoted before all fees.

Please note – options are suitable for sophisticated investors only

Conclusion (s)

Perpetual is cheap and we up weighted in the income portfolio
The hybrid market still remains ‘cheap’ on our metrics however less so than it was
Options can be used to provide additional income to portfolios

Have a great day!

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 18/04/2018. 12.16PM 

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here