[Lephturn]

Hi all,

I have been working with options for my investment portfolios for a couple of years now, but mostly using my US holdings. I do some options strategies in my Canadian holdings of course, but since the volume is so low I need to be careful. To ensure I knew which Canadian securities had enough options volume to trade with reasonably, I decided to run a screen to find a list of optionable stocks and ETFs that had a decent amount of volume. Well I dug around, but neither Questrade or RBCDI had any tools for me to do this - and nothing else I found let me run the screen I wanted. So... what to do?

Well I started with http://m-x.ca/accueil_en.php and dug around until I found end-of-day data that I could download as a spreadsheet. It contained all options that traded that day broken down by contract (month and strike) and including a total volume and open interest for each underlying. Well a good start but how do I get this filtered and sorted? The short answer is to start with manually working the spreadsheet to cut out everything except the total lines, and then use conditional formatting to identify issues lacking in volume and remove them. As I went through this process I thought about how this was simply volume from a single day (Aug. 23rd) during a low volume period and how that wouldn't really be a good guide. Looking at the data I figured that Open Interest is a much better indicator, so I'd work with that instead. Next I did some formula work to pull out ticker symbols, total OI, and then sort the whole list by OI.

So - I arbitrarily decided that anything under 10 thousand contracts of open interest was too thin, I only wanted to see things over that number. I ended up adding a couple of issues into that mix that didn't meet that screen but had over 5k in open interest and were securities I traded or invested in - namely Telus and XFN.

Phew. Well it was quite a bit of work. I thought some of you might like to see the list of 29 securities I ended up with - sorted by open interest. Please tell me your thoughts, suggestions, or ideas. Is 10k open interest too high or arbitrary? Should I try 5K, or maybe screen using some other metric?

If anybody wants the actual spreadsheet I have shared it on Skydrive. If that doesn't work for some reason, PM me.

Yikes that's small. Here is a copy/paste of the raw data.

Name Ticker OpenInt
iShares S&P/TSX 60 Index Fund*(XIU) 17.270 XIU 372,505
Suncor Energy Inc.*(SU) 31.250 SU 93,523
Continental Gold Limited*(CNL) 7.730 CNL 61,580
Royal Bank of Canada*(RY) 53.290 RY 54,411
Bank of Nova Scotia (The)*(BNS) 52.500 The 53,387
Bank of Montreal*(BMO) 57.540 BMO 38,134
Canadian Imperial Bank of Commerce*(CM) 75.600 CM 36,888
Toronto-Dominion Bank (The)*(TD) 80.500 The 34,241
Barrick Gold Corporation*(ABX) 37.870 ABX 33,804
Canadian Natural Resources Limited*(CNQ) 30.850 CNQ 30,683
Yamana Gold Inc.*(YRI) 16.580 YRI 29,785
Goldcorp Inc.*(G) 39.910 G 26,087
Teck Resources Limited., Cl. B*(TCK) 29.100 TCK 22,449
Canadian Oil Sands Trust*(COS) 21.460 COS 20,885
First Quantum Minerals*(FM) 19.420 FM 18,037
Silver Wheaton Corp.*(SLW) 33.790 SLW 16,808
Bombardier Inc., Cl. B*(BBD) 3.580 BBD 16,250
Detour Gold Corp. *(DGC) 26.590 DGC 15,959
Potash Corporation of Saskatchewan*(POT) 41.120 POT 15,722
EnCana Corporation*(ECA) 21.620 ECA 15,359
Sun Life Financial*(SLF) 23.030 SLF 14,981
BCE Inc.*(BCE) 44.420 BCE 14,851
SNC-Lavalin Group Inc.*(SNC) 36.670 SNC 12,317
TransCanada Corporation*(TRP) 45.150 TRP 12,111
iShares S&P/TSX Capped Energy Index Fund*(XEG) 16.110 XEG 11,013
Talisman Energy Inc.*(TLM) 13.270 TLM 10,568
Cameco Corporation*(CCO) 22.800 CCO 10,343
iShares S&P/TSX Capped Financials Index Fund*(XFN) 22.020 XFN 8,630
TELUS Corporation*(T) 63.540 T 5,393

 

[humble_pie]

lepht why all this analytic work ?

many of the options on you list should be traded in the US, not in canada at all. Low open interests on montreal never tell the whole story when US options also exist in the same underlying.

with each stock, it's a cinch to see what's going on. Most brokers have good displays of all option classes, all series including open interest in both canada & US. No fancy study here. Just use your bare human eye to see which market is attracting the volume & the open interest (look at all expiration dates, look esp at the telltale jan 2013s, perhaps half a glance at the 2014s to see if there's any lifeblood in em in either country.)

a bonus is that traders end up with no-FX-fee-freebie-gambit US dollars. Option trader should keep his canadian stock in canadian or US account according to the currency of the dividend. The no-brainer is that he will gradually accumulate exchange-free US dollars.

re the core canadian equity etfs: not for us are the marginal low-volume candidates like bmo, claymore etc. The only canadian etfs consistently attracting the volume we need & therefore the open interests in options that we need are a small handful of ishares. Namely XIU (cannot touch XIC because insufficient volume); plus also to an extent that's decent but not dazzling XEG, XFN & even XGD. The big problem is these ishares also have pitiful premiums. All the more reason to hold the individual stocks & sell their options rather than the etf.

btw i strongly oppose any notion about holding XFN & trying to work its options. Instead, go straight to the banks themselves. Far better deals available.

i haven't tried this, but the same seems to be true for the big energies & XEG. Option trader will get, out of CNQ for example, far better returns than he will ever earn working XEG.

jmho. Mais je le crois bien.

 

[Lephturn]

Basically I wanted to find out which Canadian equities had decent options in our markets.

Won't I have to exchange for USD to purchase the US listed equity in order to trade options on it? Or can I buy the Can listed security - get them to journal it over - and then trade the US options on it? Or I wonder if I can hold the CAN security but write calls in the US market?

The other issue is that I am then exposed to currency risk - but I suppose if it is a Canadian business in question that will remove most of that risk. IE: as Canadian dollar goes up vs. USD then the value of RIM on the US exchange goes up?

I guess I was thinking too nationally. See I knew I'd learn something by posting this and asking questions!

 

[peterk]

I also want to know this. Can I hold the canadian banks (for example) on the TSE and trade options on the US exchange. Would this still be technically a covered call? So if the option was exercised I'd just journal the shares to the US exchange where they would be called away?
Same with puts? Get shares assigned to me and journal them back to the Canadian exchange to be held?

 

[Argonaut]

Or can I buy the Can listed security - get them to journal it over - and then trade the US options on it? Or I wonder if I can hold the CAN security but write calls in the US market?

This is what I have done with shares of Silver Wheaton, which has more activity in the US options market. Worked fine. Thinking about selling Jan 2013 @40 calls on it.

I was also wondering about your second question, because it seems US premiums are higher than in Montreal the last time I checked. Maybe a little arbitrage can be had with a buy TSX sell NYSE option strategy. Susceptible to major currency fluctuation though.

 

[humble_pie]

I also want to know this. Can I hold the canadian banks (for example) on the TSE and trade options on the US exchange. Would this still be technically a covered call? So if the option was exercised I'd just journal the shares to the US exchange where they would be called away?
Same with puts? Get shares assigned to me and journal them back to the Canadian exchange to be held?

about to post a reply to lepht & noticed your post. Be careful with canadian banks & US options, the volumes are increasing slowly but this is a recent phenomenon. I don't know if liquidity in US options in canadian banks mis yet as good as it is in montreal.

i trade canadian bank options in montreal only. Yes it is a beastly procedure. But i haven't yet seen how US markets for these are really any better.

in my next post to lepht i'll mention effect on margin when trader crosses his stock & option holdings (bref: margin can get worse, it depends on your broker.)

 

[humble_pie]

1.) Won't I have to exchange for USD to purchase the US listed equity in order to trade options on it?

2.) Or can I buy the Can listed security - get them to journal it over - and then trade the US options on it?

3.) Or I wonder if I can hold the CAN security but write calls in the US market?

hey lepht pretty amazing to hear about your little twins plus a toddler just under 2 ! You must have your hands full, but i bet they are adorable beyond belief.

now to your 3 questions. A lot depends not only on margin position but also on how your broker separates US & canadian account subdivisions for purposes of margin calculation. When margin is calculated on total account, all is a breeze.

1.) No, never.

2.) i for one don't journal, except when necessary at the very beginning in order to place the stock in the currency account of its dividend (in order to avoid brokers' FX fees on these dividends ... a different topic ... there are threads on this topic.)

this part of my portf is dedicated to high-dividend canadian payors (get the tax credits) plus very liquid common stocks usually in both canada & US plus liquid options markets w plenty of series & classes w hi open interests.

once stk is moved into its permanent currency account, it stays there. These are not active trading stocks. These are geese that keep on laying golden eggs. So they stay in their nests year-round.

what this means is that short sold options can & do get separated from their underlying stocks. Investor has to manage all this. If assigned, the broker will not automatically journal stock for delivery. But even with assignment, client does not need to worry. There are still 2 days to settlement, it's easy to call broker to request stock be moved.

3.) this is what i do in some cases. BCE is a good example here. I hold stk long in CAD account but can choose among both US & canadian option opportunities when it comes time to sell.

argo has another example with silver wheaton. I wouldn't say, in a rigid way, that *all* US prices are better than canadian prices; but it is *always* worth looking carefully at both countries. One thing i am sure about, which is that the fishing is far, far better stateside. You can sit all day in a boat in canadian waters & never even get a nibble.

when crossing underlying stocks & their options between & among different accounts, the effect upon margin must be monitored. For example, at many brokers, holding BCE long in CAD account but selling BCE options in US account means that those short options will be, as far as the system is concerned, naked. In many/most broker systems, such options will not be regarded as covered. Margin rates for these will consequently be more draconian, less favourable.
-
as for the forward effect of currency shifts, this doesn't concern me hugely because i'm an assignmentphobe. It's true that i do accumulate US dollars from option sales, but these are all FX-free gambitted dollars. Aren't these what we're all trying to obtain ?

 

[humble_pie]

credit where credit is due.

i believe i recall that avrex posted up a nice list of canadian stocks w liquid options a while ago ...

the reality is that there are not very many hi-quality canadian dividend payors with liquid options markets. Or else hi-quality canadian stocks w lo dividends or no dividends, but the options have noticeably valuable premium to sell.

at the end of the day traders can work up their favourites list by hand, i imagine. Because such a list, for canadian stocks, doesn't change very much. Good old canadian stodge prevails.

 

[Causalien]

Sell put, get assigned, journal over to US side is how I've always done it.

For example, I've been trading Cameco for a while and compare the CDN volume ~10 per day on the most popular to the US volume ~100s and sometimes 1000s. It's incomparable. It takes me 3 days to get my orders filled on the Canadian side.

 

[Lephturn]

when crossing underlying stocks & their options between & among different accounts, the effect upon margin must be monitored. For example, at many brokers, holding BCE long in CAD account but selling BCE options in US account means that those short options will be, as far as the system is concerned, naked. In many/most broker systems, such options will not be regarded as covered. Margin rates for these will consequently be more draconian, less favourable.

Which means in a registered account it won't likely be allowed. Certainly not at RBC-DI. I'm going to have to call both RBC and Questrade and see what they say, but I presume I'm going to have to gambit the money over first and just trade it in the US where appropriate.

 

[humble_pie]

[in non-registered account] I presume I'm going to have to gambit the money over first and just trade it in the US where appropriate.

in rrsp, of course not. At least not outright. It *is* possible to do a sort of cross, ie hold stock or option long in rrsp but another option short in margin. The logistics of undoing this kind of position are somewhat complicated. Not to be recommended.

but in non-registered, why wouldn't rbc or questrade or any other broker let client hold stock long in CAD side of account but sell options short on US side ? all brokers should allow this.

is client able to sell naked options in US account ? will his margin permit it ? if yes, he can cross-trade his options. if no, he cannot.

returning to what i mentioned upthread. If any assignments occur, broker is not going to handle these automatically. Investor must stick-handle all developments.

 

[Lephturn]

It's registered that I'm really talking about - I should have stated that up front, sorry. For non-reg I don't mess with anything Canadian anyway. Looking at my buckets of capital it's the retirement bucket that is the big one, so that's why I'm doing the work as a decent chunk of that is Canadian companies. As to what % should be Canadian, well that's another question I'll need to delve into, but my starting position is about 50%.

I will boil the list down further - dividend payers etc. - but I didn't want to start with the whole list and then find out 80% of what I picked has no options or no volume, so I thought I'd start on this side first and then work back and filter from there.

As I further boil down this list I'll update with my findings. I know there are others with lists I could look at - but I'll feel much more comfortable if I end up with a list that I chose myself. In order to really be confident I need to do my own homework. Doing my own push-ups here - so to speak.

 

[humble_pie]

pushups are always good. But in the end canadian investors arrive at mostly the same small list. There just aren't that many eligible companies in this country.

in canadian stocks, looking for hi quality, liquidity, stable history, liquid options markets either in canada or in the US, with or without a hi dividend yield ... means that ... all roads will lead to Rome.

 

[Lephturn]

Stupid RBC-DI - I can't put them all in a watch list. They limit a watch list to 15 or something. Sigh.

Instead I set it up on TMX-Money - it's free and they don't arbitrarily limit their list size. I tired Yahoo Finance first but they are too inaccurate for Canadian stocks. I will be focusing on dividend payers, but at this point all but two pay a dividend. I'm now going to further sort and filter this list on various fundamental factors to get this boiled down to a half dozen at the most.

I'm sure I will arrive at the same small list - but I will be much more confident in that list. I need to be 100% certain so that I can follow my rules and not be swayed by the fear that might come from a lack of understanding or confidence in the securities I choose.

 

[avrex]

Avrex - List of Canadian TMX Options

Hey Lephturn, I just got back from vacation and noticed your post. Nice work.
It looks like you and I both went through a similar (tedious :smile analytical exercise.

We are both trying to determine, which "TMX options are suitable candidates for trading".
We looked at a one-day snapshot of options activity. Our criteria was a little different. You looked at >10k Open Interest. I looked at >500 active volume for the day. Both of us were trying to come up with a criteria, where we could hopefully find a strike price, for the underlying that we chose, that was suitable for trading.

I originally posted this analysis on the 'Options' thread, back in March.
I have re-posted the results of my analysis here,

​

http://www.avrexmoney.com/options/canadian-tmx-options/

You discovered 29 possible candidates
6 of yours, I felt should be traded in the US options market only.
In my analysis, I discovered 28 possible candidates.
We had 14 candidates the same :smile:, that we felt we could trade on the Cdn options market.

At this point, I still haven't traded Cdn options (US only to this point). However, I'll be sure to refer to both of our lists, when the time comes.

 

[humble_pie]

in canada, all option roads lead to Rome ...