Trade 129 Week Ending 26April

That Was The Week

Something of A Nothing.

FTSE opened the week at 7459 and closed at 7428, the high was 7528 the low 7398. Another week bounded by 7400 and 7500. Another week of protests inspired by a teenager. Without getting too political it just seems obvious that tackling climate change hurts nobody. Our one planet wins, new jobs will be created and corporates might be hit in the conscience. The endless grind of more debt in pursuit of more growth is just a cycle, that is tired. For us mortals, it’s the velocity of money that counts. Untold billions in secret bank accounts help nobody. OK enough politics. What’s going on?

FTSE options chain is unremarkable- no obvious open interest* at any particular strike. We noted back in February, open interest* showed an inordinate amount of 7600 calls for March – 91553. I opined this this meant little in isolation. We speculate these could have been sold some time ago. Fact is FTSE got nowehere near 7600. Part of me suspects some tipster did some flawed analysis, which brings us neatly to:

How Techie Are You?

Thanks to Elitetrader.com and the Big Short

Above is a chart of VIX futures front month relative to far month when in contango. The front month vol is skewed higher than it ‘should be’ as I understand it. Therefore you sell the front month and buy the far month. This, however is the futures market. Hence this is a derivative of a derivative of a derivative of a derivative (hurts your brain doesn’t it?) Actually it matters not what it is, as it’s just another market to trade. I should add another derivative by the way!

Futures v Options

I have traded futures in the past and quite honestly I used to do ok but they are just too brutal when you are wrong. Traders come in all shapes and sizes, but I would argue that we have one huge advantage overall. Theta. We trade using this advantage, expecting that our risk is reduced over time as trades turn profitable. People new to trading seem to have difficulty grasping how this may not just be used in one single leg. They then discover strangles. Futures traders cannot do that without locking in a loss. Options traders can keep adding to positions to adjust. We can buy one more,sell one. Or two and so on. Flexibility is our second advantage over futures. And so…….

What Kind of Trader Are You?

The above chart reminds me why I don’t undertake such sophisticated analysis. I’m an idiot!  What type of trader are you? My own take is that I have a vague idea about the market, I then look at options prices. Thereafter I drill down to the details, the Greeks. I have evolved over many years to find the style that suits me. On my bookshelf there is a tome about a trader who took 18 years to become profitable. I’m sure some people pile in after a $5,000  one week course and make it work. Each to their own.

The possibilities are endless with analysis however, and I am glad there are quants, chartists, fundamentalists. Same goes for platforms and instruments. We have narrowed it down to the index. Because…… it’s what works for us. Equity options for UK traders are really a desert. So little activity compared to the US. I really hope that changes, and that is in part why we have this site.Shareholders take note…. http://e.theice.com/EQ_Mar_2019

UK options are traded on the ICE.com Anyone holding shares should be aware of options to enhance their holdings. Either to insure with long puts or to increase yield by selling calls or both!

The Running Trades…

TRADE128

Long 7350,short 7450 x2. We could spice this up, and add a put butterfly  57 -(29×2)+ 16,= 15 (strikes 7400,7300 7200) and convert the call ratio spread into a butterfly by the addition of long 7550 call at 18. ( 114.5 – 53×2) =8.5+ 18 =26.5    Thus, we are now in for cost of 41. As ratio spreads only we lose our safety harness and go commando, but our costs are trifling. 8.5-1= 7.5.

And now?…. the call ratio spread is 90-(36×2)= 18. We paid 8.5 That’s a win! As a butterfly we’d have paid 26.5 and now it’s 28.5. See what I mean about ratios and ‘flies? We could close out the ratio trade comfortably having made serious coin.

Put butterfly is 18, we paid 15. As a put ratio spread for a credit of 1, it’s now 65.5- (32×2) Not so peachy but not a loss. We continue to run these as ratios and ‘flies.

Trade 129 Going Out on A Limb, or a Wing

Selling 3x 7200 May puts buying 1xJun 7250 put and 1×7100 put

This is a quasi butterfly/ratio/calendar -I imagine there is a name for this somewhere. So what do we have? We are selling 3 of the May 7200 puts at 16.5×3= 49.5. We are buying 1x 7250 Jun put 68.5,and buying 1x 7100 39. Cost, therefore is 107.5-49.5=58. 

The logic of the trade? We want to own some big puts for June (sell in May and go away come back on St.Legers day). Who knows where the market will go but our risk….. You can do the ‘math’. We have delta, vega and theta in our favour. And gamma? Almost nothing.

So, remember these are fun trades base on simplistic analysis dreamed up by an idiot. And yet nothing to date has gone horribly wrong!

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:

    trade 129 paid 58 now 68.5 and improving all the time. Might be a better trade than first thought,and certainly has a lot of wiggle room

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