205 W/e 29Jan Shorts, Games, Stops


That Was The Week FTSE Dropped 4.3% Robin Hood Became The Villain

No longer front page but a number of hedge funds took a huge hit as around 4 million small traders kept on buying stock in GameStop. However it was ramped umpty% having been a $19 stock which may not even be worth $19!  So how did we get here? Robin Hood the broker, and Reddit, a social news aggregation, web content rating, and discussion website(allegedly). Bored youngsters with $40 spare who are savvy on the ‘net, are doing crazy things.

Through such powerful access direct to market and to forum users this has become a weapon. So, what’s the problem? Shorting, as hedge funds do, is a mechanism for price discovery, in that an overblown stock should be exposed. For so many years stocks have been hyped up by Wall Street, now the HFs want the stock down, retail traders struck back. However earnings per share are negative!  https://finance.yahoo.com/quote/GME/

A company that’s been around since the last century and a business model that is of the same vintage. Seriously– why would anyone buy this unless it’s a bit of devilment? However, rumour has it that Elon Musk was musing about $GME. Bear in mind the internet made ‘Pizzagate’ which started as a joke, become gospel truth for tens of millions and changed an election outcome.

Readers here will know I had a bit of an issue with Tesla call buyers -also on Robin Hood, and the power of options should never be underestimated. Though this time it was mostly the binary actions of buy and sell. I make no judgement of who is the bad guy here but this is a serious problem.

Sage advice


The above link about $GME may be time limited.

Distraction Trades

DAX showed a bit of promise(YAY!)  3 daytime trades 8, 9, and 1pm this week each for 200 points. Hard to quantify these after such a dearth of entries. We need more signals, or extreme patience.

Legacy Trade  203 and 204, 205 What can we come up with?

Trade203 and 4 permutations

So,  some fun. Future= 6679 Cash= 6735

Some strategies:

1. (risk reversal) selling the 6900 call  for 63 buying the 6400 put for 57.5 Credit 5.5, risk unknown.WIN ( Best outcome Friday poss close for credit 12)

Running this,  137.5 WIN

2. , short call spread 6800/6750 ( 129.5-104)= Credit 25.5 max profit 25.5 WIN  (21.5 to close- marginal win, we run it) Now 5 to close, make 20.5 WIN 

3. a long put spread? 6450/6400 (66.5- 57.5) Debit 9  max profit 41 LOSER! (small loss, it’s now 8 ) Now 22.5 WIN

4. Big Lizard- a Variation of the Jade Lizard  Sell ATM call spread and put. So for simplicity let’s use 6650 strike. Call spread 6650/6750 (189-129.5)=59.5 plus 6650 put 118.5. Total premium 178.  Therefore, our risk to the downside at 6472 upside risk 0 as the premiums exceed the 100 point width of the spread. WIN       (161.5 to close giving credit of 16.5– but would you?) Yes– you close this or you get: 286 to close the short 6650 put-  LOSER

Our outfront leader for last week was thus the Big Lizard, we run all of these. How much more fun is it to have 4 potential trades instead of: long or short?

Running these you’d now have a loss with the Big Lizard of 18 for the call spread+ 286 for the put= 304-178= 126 Loss

However -our wins 137.5+20.5+22.5 =180.5   Minus the 126 loss. =54.5 WIN

Trade204 In a Stagnant Market


Let’s look at a low risk trade- the Iron Butterfly. This means we buy the wings and sell the body: wing 6800 call 61,  body:( 6700call 108, 6700 put 128),  lower wing:6600 put 90. Thus we have 108+128= 236- (90+61)= 151. Which gives 77. Risk therefore 100-77=23 

Horrible- right now 87.5 to close- will we see 6700 again this cycle? LOSER

NB I commented that my delta calculations were wrong- who spotted it? Butterflies are generally ±Delta neutral

We will run these some more,for fun. though all the downside trades have done well.

Trade205 Strangle versus ratio

Selling Vol. I was once told that in a big volatility expansion it pays to sell both sides as the contraction can often make the trade a win regardless of direction.  VIX is up from 24 to 33. So how would one do this? Sell a strangle? What if you bought lower vol and sold more and higher vol?

Compare and contrast Strangle: 1 ∑( one standard deviation) typically 0.16 delta gives us Call: 6700 @21.5 Put: 6000@44 total premium 65.5 risk at 6765.5 and 5934.5.

Ratio that:  Puts 6200 and 6050×2 give us 78.5  and 51×2.=  23.5    Calls 6650 @ 32, 6700 @ 21.5×2 = 11  Total premium taken in 34.5. Risk at 5855 and 6795

Consider the Greeks below, but also premium taken in, and possible outcomes. The ratio could make an additional max 150 risk is further away. The strangle is a one trick pony, you just want theta to kill the premiums. Who is selling more vol? Does it matter,given the other complexities?


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