Naked -Not So Much Fun- Trade 72 Special

 This Was The Trade:

SELL the 7150 call  @19.5 (230 OTM) and SELL the 6300 put @20 (620 points OTM). Credit 39.5. Risk at 7190 and 6260

FTSE was 6920 on March 23rd- now it is 7264. OUCH!

FTSE has risen  5% since 23rd March. Why? Too much money chasing a home? Or this:

 

                                                                                                                        FTSE May Now Actually Be Cheap.

It is a bit of a mystery that earnings could have improved by so much but sometimes it’s the oil sector that has a massive negative PE that brings the whole thing up. Price to Earnings Ratio is key for longterm investing. When it is high it is plain silly to expect a good outcome as historical data shows.

 

Back to The Trade:

It is now in a sorry state. The 7150 call is now trading at 119. The trade took a credit of 39.5. We talked about worst case of one side going to x premium. A smart trader might however have closed out or adjusted this after that nutty day April 5th when FTSE smashed up almost 200 points. But…let’s assume the trader has stuck with this trade and now faces a loss of 80. How can we save the position?

Getting Even

To get back to a non loss-making position we need to take in about 80 in premium. A tall ask, given the prospect of a global war. That is how I view it as a cautious trader. I hope I’m wrong. However for purposes of this trade we have to use Friday’s prices for May, for better or worse. So what have we got? 7300 call at 53, the 7000 put at 34. Gives us 87. Is this a sensible move? No it’s what we are dealt today. Ideally I’d wait until events unfold next week and there may be wild swings. Remember markets love a war, it’s great for business.

In Summary

We can roll up, down, in ratios- near month far months-next year even! We are only limited by our own choice/analysis. Selling naked means you will get caught sooner or later. A short strangle in february would have got very uncomfortable on the put side-but you could have rolled. You can play catch up forever, which is why we do NOT, repeat NOT like naked trades. We will keep this situation alive until it is resolved. Just for illustrative purposes.