Trade 126 That Was Another Odd Week, Ending 05April

The Week’s Charts:

My simplistic view of price and volatility of the underlying- do we need more? I accept I have a bias towards the downside which does not often coincide with market action. Trading with a bias is like cycling no-hands. It’s no problem until you hit a major curve or a bump in the road. This pre-Brexit period however is a mystery. Volumes are not below par, we are ticking along nicely. We have another upward slope. My thanks to https://masterinvestor.co.uk  The London show yesterday was well attended and made a fascinating experience. I am a trader not an investor but I like smart commentary and new insights.

So, my takeway from the show (especially Jim Mellon)- the Eurozone is in trouble except Germany. Borrowing in the zone is 133% of GDP, the UK is 85% of GDP. Several economies are near or in recession, and nationalism is rising- yellow vests etc. Therefore while UK is bumping along, the FTSE100 companies only derive 16% of income from the EU.Thus Brexit is not such a big deal for the index. I wish I had done more homework on this. We also learned that the UK stockmarket is a tiny 6% of the global stock markets. The US is about 50%.

We were told that UK investors, given access to the world’s markets are way too heavily invested in the UK. This is home bias-and does not best serve our profits. (Irony at 11, as bias is my downfall). Good to be told however, the UK banks have done well in repairing their balance sheets. Dividends in FTSE are high and may not be sustainable but FTSE on P/E basis is cheap-ish. I understand debt is again the monster coming over the hill, and it is a global issue.

Jim Mellon demonstrates the curious relationship between world index and central bank activity.

How Did We Do With Running Trades ?

Trade 123 a Win, and closed

Trade124:Wide winged butterfly Apr puts 7200(long) 7000(shortx2) 6800(long) strikes. So, our cost 34 dropped to value of 25.5 and looking dismally dismal. Quite frankly- as it is now only worth 3.5, here’s what I’d do: Use the long 7200s as the lower leg of a butterfly, with FTSE at 7447, it looks unlikely the market will drop even to 7200. Thus we redeem some premium and have a glimmer of hope with: Long 7300 put, short 2×7250,giving us a credit of (9.5×2)- 14.5= 4.5. We may get a blip down to give us some value in the 7300 put. 

Trade 125

So,we had the  7150/7100 put spread and 7400/7450 call spread.  Thus premiums on offer for the put spread 45-34.5=10.5, and for the call spread 28-16.5= 11.5. A total of 22. Currently, the put spread= 1.5, the call spread 31.5. This is why I stopped trading iron condors -the market just keeps smashing up. It’s why everyone sells puts. Did I mention how much I hate calls? I have yet to find a smart way to buy them(volatility works against you)  or sell them. The answer generally to negate some of the effects of vol and theta is to use spreads. I don’t like selling something for 11.5 that could easily go to 50.

Trade 126 Seeking Some Action

Here’s a curious little trade that came to me during the week. I thought of a crude variation of a ‘borrowed’ strategy of the ratio calendar straddles.

Apologies for the dating of the trade, from 03 April. It was a snap decision based on impending political chaos. This was an entry for a debit of 31-currently about 24. Here’s how it breaks down: We are buying two 7400 straddles (one call and one put) in April and selling one 7400 straddle in May. The above numbers give some idea of the values. Deltas= 0.37-0.80 x2= –0.86 against 41- 59=-18. Theta is ugly 6.3- 2.47=3.83. Gamma is huge (19+34×2)=106 against 28….Yuuuge

The ethos is simple however- we have one extra straddle for a big market move for a modest price. We are not directional but need a big move either way. Time decay is ugly and we may have to close out early.

Filed Under: FeaturedInformativeLearnStrategiesWeekly Trade Idea

About the Author: First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

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