Trade 108 Week Ending 30 November

So- What Happened This Week? Clearer Direction? Big Dramas?

7036 to 6980 -It looked racier than it was. Yet again this sideways action suits some trades with the slow grind of theta.



December thoughts From the Big People

Hope the link works- I get a plethora of helpful emails-and yes, 95% from The US. The message is clear- the City here does NOT want traders taking money from them. The US is a level playing field that encourages people to take control and manage their money. A market only works when there are participants. I’m sure my broker would like me to trade options on Fresnillo as I like silver. Should anyone possess the tenacity, go to the and get the UK equity options prices. Scroll down and note- there is NO open interest in Fresnillo. I don’t want to be hugely directional, I’d like to buy a call spread- maybe finance it with a put spread. I am not able to find other participants. Nothing to trade here.

Option Sellers Get Killed

Remember this? Here’s the chart of NG  options volatility-ouch!

So, when you sell naked and you are very wrong, the volatility ‘right now’ will get you. This applies to any trades- the VIX has been as high as 89.53, and that, as you know is a measure of S&P index options. An index of 500 stocks cannot get too crazy- right? High volatility is not a problem if you are not naked, or even if you have some kind of hedge. Even better if you are on the sidelines looking to pile in.                                                                       Many of us made serious coin in  2008, selling into high vol,closing out when it dropped. It’s a Black Swan event for an index, but for a commodity, who knows? I was recently reminded of 1976 when oil jumped from $3 to $12 a barrel.BOOM! It’s $50-$60 these days and has been as high as $114. Here we can look back at NG

Hope the link works-there have been crazy spikes in the past- reflecting external events. So, if you plan on trading commodities keep a weather eye on the histories.

Trade 108 and a Note on 105/106 and 107

So, no movement on the iron butterfly from trade 107. Remember we took in a credit of 86.5. Now it is 85. 105/6 is in profit overall but it has more time to run. We’ll keep you posted. Thus we come to Trade 108

Don’t take my word for it- the excellent new calculator from our chums at CME works very well.

Trade 108 a  double ratio calendar

Shut the front door! Say what? Ratio as in selling two options and buying one. Calendar as in selling the near month buying the far month. Double as in puts and calls. This could also be described as a calendar strangle one by two. All clear now?

We are selling 2 Dec 6500 puts, buying one Jan 6500 put (16×2, 39.5)= debit of 7.5.

And…. we are selling 2 Dec 7300 calls, buying one Jan 7300 call (10×2, 30.5) debit of 10.5. So we have a total debit of 7.5+10.5= 18.                   Therefore we hope our long Jan options will be worth more than 18 in total. We also hope the FTSE doesn’t go too far above 7300 and too far below 6500.

So- the logic of the trade- time decay mostly, and it is almost delta neutral. The keen eyed amongst you will note in the past we have done a three by one. Sometimes those are too risky, but here we still have a fair chunk of time to go.

Check out The Greeks

Hope it’s clear enough- call deltas are neutral, puts 0.03 against us. Vega is far greater for the Jan options, but theta is our friend and ally. Thus if we go nowhere in 20 days, our longs should be at least worth a total of 18– hopefully around double that. Bear in mind we can close out early, in expiry week our shorts could go to <1, so it might pay us to close the whole position. Exits are personal choice,though the logic would be that an option trading at 1 can only lose 1, whereas an option trading at 30 can lose considerably more in the same time period. I hope there is a Santa rally as here is little to cheer the UK currently. The ‘B’ word is off limits. Enjoy the journey, love the trades.

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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  1. Terrapin Trader says:

    I think that we have been very lucky with three by one ratio trades in the past- in the last two months these might have got very ugly. While we learn nothing when we fail to make mistakes, these trades are for demo purposes to show the workings not the outcomes. Though the wins are a happy outcome and demonstrate how flexible options are -our core function is to show options trades warts and all.

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