Noel Campbell
Noel Campbell

There is no doubt over just how powerful this latest run up on the DOW has turned out to be, session after session of higher highs and lows. The chart said ‘watch for a bounce', but one with this much first up ka-pow? The SPI200 has continued to new highs and heading into the time pressure here in November.

This week we are going to take a look at Suncorp (SUN), and where the stock is poised on the bigger picture. There was a long ABC trade on SUN during the week, but considering the position of the stock on the bigger picture, it was a trade worth letting go. But we can take a look at the ISF contracts available on SUN to find out more on trading this security with the increased horsepower of futures.

Chart 1 is the weekly chart of SUN from late 1999 through to the present. Using the ABC Pressure Points Tool we have the major range from the March 2001 low ($7.32) to the major top in August 2001 ($15.45). This gives us a major bull cycle range of $8.13. The next major low for SUN, after this, was in March 2003 ($9.12). Adding percentages of the $8.13 range to the low of $9.12 gives us a 100% target of $17.25. Point B for the ABC long trade on the daily chart was $17.34, the current all-time high. On the bigger picture, this stock is potentially near the winter of this bull cycle. Time to watch the daily and weekly swing charts for safe short trading opportunities. Those who use ‘time' as a part of their plan, know to look for time pressure to back up their analysis.


Chart 1

click chart for more detail

When you are trading ISF's here in Australia and the US, you will be generally dealing with a market maker when you buy or sell. They are controlled by a quoting formula, which determines the approximate pricing they are offering. The two key components to that equation, is the time left until a contract expires and whether a dividend payable is pending before the contract expires. We can investigate the formula more closely some other time. Part of that may sound like futures have time decay, like an option. In some respects that parallel could be drawn, however the decay in the premium of time for ISF's is virtually a straight line, unlike options with their exponential time decay curve.

Chart 2 is a split screen of SUN, with the January and April futures contacts overlaid and linked to the same scale.

Chart 2

click chart for more detail

As you can see, January is trading above the physical stock price and April is trading nearer to par. The first thing that shows, is that no dividend is due again before the January contract expires, so the biggest influence in the pricing, is the time left until contact expiry (cost of carry). There is a dividend payable before the April expiry. The market makers are factoring in a drop in the share price when the stock goes ex-dividend. The April futures contract still has the premium in it's pricing, associated with the time to expiry. With one part of the equation, working at cancelling out the other, the futures quotes for April are much nearer the underlying stock price. Getting you head around how the futures are quoted, relative to the share price takes a little time. The good news is that it all ‘works itself out in the wash'.

The key warning I'd have is, be wary of the contingencies that can occur on payment of a dividend. If you are in a trade where a dividend is to be paid before expiry, be sure to have done some quick research on the ASX website, to find out the likely payment date. If you were trading off a daily chart, the January contract is more than suitable for now and if trading off the weekly chart, you may consider looking to April, the dividend will not be payable again until late February, early March.

Until next week......

Noel Campbell