Trade 168 Week Ending 07February

That Was The Week- A Big Up, Ending on a Sour Note

The unknown that is coronavirus is now looking a little more ominous. This trader finds the market’s arrogance staggering. With no possible way to quantify this risk, how could the so-called bulls buy like it’s 1999? Up almost 3% until Friday. We saw positive non farm payrolls(see link below), and some good company reports. However these are historic and bear little relation to a global exogenous event. Just my 4pen’orth.

https://www.marketwatch.com/story/the-us-created-514000-fewer-jobs-in-2018-19-than-originally-reported-heres-what-that-means-2020-02-07?mod=mw_latestnews

The Tesla Meltup

Here’s some useful insight: https://ihsmarkit.com/research-analysis/who-would-short-tesla.html

A great many calls were bought and the market makers may have to hedge their short call position by buying stock. This can be a feedback loop where the derivative drives the underlying.(This trader believes derivatives run the world )So whatever one thinks about a market or stock it’s always easier to take a view via derivatives. Remember though that stocks can move ±40% -even the massive ones! You don’t want to sell naked anything

 

Legacy Trades – Trade 166- Once an Ugly Duckling

7600/7450 put ratio spread

We were facing a situation where the 7450 short puts were also in the money. And we were looking at loss of 96.5.  Now 169 and 69(x2)= 31 profit

So, what’s to do? Let’s examine a few of the manifold strategies.

Traders with a will of iron may just take the hit– close out, look for the next opportunity.  This is now the worst of all moves as we could always adjust -as below.

Complicated Stuff Ahead!

 

  1. We could convert to a butterfly -we would have to buy the 7300 put at 125.5 – savage unless we do something like sell 2×7150 puts (66.5×2) or a March 7150 put (121) We could also look at selling calls7450s are trading at 34.5. We are now in a whole new area of risk, though rolling into next month might be kinder to one’s mental health. So how did this do?  7300 put is now 24.5 the 7150 puts are 9  7450 call =59*. But our original trade is in credit for 31. This is a maths challenge, but we are ahead. The March 7150 put is now only 43. And maybe in line for more profit* though the call is still an issue, which we didn’t need to do really. Or close out
  2. We could close out the long 7600/7450 spread for 128, look to swap out the short 7450 put for  March 7350 at 215. Buy a 7500/7350 put spread,(cost 102) thus lowering our risk to 7200. This trade could also give a max profit of 150, and we took in a little 26 extra of course(128-102) . Now the March 7350 put is 91.5 the 7500/7350 spread is now161.5 and 91.5=70. We have a small profit, a juicy 7500/7350 put ratio spread or close out.
  3. The whole position could simply be swapped out for March 7350/7250 put ratio spread (215, (162.5×2))=110 credit which is now 91.5 and 62.5×2 =33.5 against us
  4. Sit on your hands- wait and see if the market moves gently back in our favour.

 

These are just a few suggestions but the received wisdom is to sell while volatility is high. We know this is usually a condition that does not generally last long.However that does not mean that the whole position has not shifted. It most definitely has. Support became resistance and so on.

Trade 167 Going All In Eating Vol

Strangle or short straddle, one can choose either or actually any number of strategies to capture the big volatility. Confession time, however as we are a little adrift with the market, but again we can show adjustment as and when.

Straddle time it is. Closest to the money 7275 call=95 put=113.5. We sell both for credit 208.5 looking for quick vol shrinkage as the market digests news and moves on.Risk at 7066.5 and 7483.5. A little blip up, vol drops and we are done, looking for a modest profit.

185.5 call 20.5 put= 206– best we could have done was about 10 A bigger blip than we wanted! Or close out for a bust.Let’s wait and see.

This Week’s Shining Example: Trade 168 Directional To the Dark Side!

Too cheap to buy puts outright? We look at a combo (combination aka risk reversal) long 7250 put   short 7550 call. We have a tiny credit of 1.5 by selling the call for 19, buying the put for 17.5. Clearly we want the market to drop, and we are synthetically short a future. By the deltas you can see we are negative 0.41, instead of £10 a point as with a future*.

It’s a cheeky trade and if it goes wrong we will look at adjustments.

*futures have a delta of 1-they move in 100% correlation with the market

Filed Under: FeaturedInformativeLearnStrategiesWeekly Trade Idea

Tags:

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

RSSComments (1)

Leave a Reply | Trackback URL

  1. Terrapin Trader says:

    Trade 166 now looking at healthy profit minimum 36
    Trade 167 that straddle- 185, profit 208.5-185 =23.5
    168 profit 1.5+4.=5.5. This was not what we were looking for but closed out as the panic did not materialise. Ideally we need a move of 70-80 for these to yield 20 or more.

Leave a Reply