Trade 103 Week Ending 26 October

That Was The Week, a Bit of Uppy Downy For Once

A bit of excitement this week over 250 point range but basically after all the shouting, FTSE is down about 100 points. More to come? We need a good shake out sometimes as Vol has been in the closet for so long. and on that note……………

So Where’s The Vol?

Screenshot from Thursday. This shows the prices I would have expected with a one standard deviation put in this raging ‘bear’ market. Actual vol at 20.66% is just an insult. Being ‘nice’ at 26% gives us premium of almost double ( 51.6). Market dropped another 1% from here but even then vol was only around 24%. I’m sure I have mentioned this before but in the early 2000s I would expect calls to be priced at 20% vol and puts 28%. Clearly we have traders who don’t remember 2008, and think that selling puts is ‘free money’. It certainly is, until it isn’t. Thus that 20 premium becomes 400.         I think that we could find people who sold naked 7500 Nov puts back in August. Gamblers who sold naked 7300 puts, more recently.

 

Education vs Gambling

After my attack in last week’s missive on the random punters of RobinHood options, I feel a more conciliatory tone coming on. I made myself unpopular by pointing out the free education available to Americans. Surely there is no good reason for ignoring free education? The world’s great achievers all had education, ok maybe Genghis Khan not so much. There is a serious point here though. Trading is an academic and financial exercise. Thus it’s easy to see it in part, as a game, thanks to the internet. Squiggly lines, company earnings,reports, pundits tips. Everyone’s a genius when they guess right. Black Scholes equation helps us keep out of misery, when we have that education.

Trade 102 Suck It And See

Having sold a part-hedged 6600 put we are in a credit trade, and will have to hang on for a couple of weeks yet. Theta and vol are our friends, as we have now sold more options than we own. Our long spreads hit max profit at or near expiry. However if the market takes a tumble below 6550, we will need to adjust/roll/get creative. Trade 102 is an example of an adjustment, but without disaster- I’ll try and create one of those. Oh wait…….

Trade 103 Courting Disaster

I have tried previously to make a real disaster, in order to show adjustment posssibilities. Here’s a plan- let’s sell a straddle. We are selling calls and puts at-the-money. Thus we have 6900 calls at 112.5 and 6900 puts at 127.5= 240. What could go wrong? I’m hoping plenty could go wrong, but think about it. While this is a naked trade, you have credit of 240. Therefore the market needs to move against you >240. This gives 6660 and 7140 as our risk levels. Anyone care to take a punt on which of these will be hit? I don’t think it’s the worst trade in the world-delta neutral with nice wiggle room. We have 20 days to expiry. Theta is big, Vol is big. It’s going to be a winner isn’t it? I hope not for the sake of education.

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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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  1. Terrapin Trader says:

    I honestly don’t know where these trades come from- it’s certainly not genius!

  2. Terrapin Trader says:

    trade 103- a handsome win again!!!! What does it take to have a disaster? I think you could close out the 6900 straddle for 190. Adjust? What else could we find? er this trader couldn’t se any reason to keep this trade alive- so close out,and take your monster profit.

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