Trade 169 Week Ending 14th ♥ February

That Was The Week Not Much To Report

So, the buyers jumped in with both feet, clutching sweaty fivers. Nobody knows why-given the unquantifiable risk of COVID-19 (maybe they think they have the’ inside’ track). However we know the market does nothing for a good reason. S&P and Nasdaq hit record highs. I read an interesting piece this week about a fund manager who admitted he was simply gambling. Commodities up or….commodities down. Directional trading thus limits your profit potential, as like a coin toss you will probably be right <50% of the time. Did I mention exit is everything. Dwell upon that a moment. And when you see the outcomes of the legacy trades, understand how powerful this is. Despite being of very limited intelligence these trades I chose,are winners. Because options make you profitable when traded half decently. Over 95% winners- that’s not luck over 168 trades.

Much Overlooked -Point and Figure. Powerful Imagery

Thanks to Stockcharts.com -Don’t you just love the immediacy of the image? X‘s go up 0‘s go down. Simples. Scorn is oft poured on arcane methods such as candlesticks MACD and the above point and figure. What is key about this chart is that it’s about ‘vol’ action. Timeframe gets a ‘nod’  whereby months are denoted 1-9 and then A,B,C for October November and December. Note the ‘2’ for February. But don’t linger on that -this is about the volatility of volatility. It’s a calculation of vol given an easy to digest numbering. Note how 12 is a low, 19 a high, and these do not last for long. Tradeable? Absolutely– vol is key for us. Directional players have no such tool in their armoury.

Legacy Trades- ALL Good.

From 11th Feb: Trade 166 now looking at healthy profit minimum 36

 Now 199.5- (73×2)= 53.5 profit. Every time a coconut- sit on yer hands.
Trade 167 that straddle- 185, profit 208.5-185 =23.5 now 208.5-157=51.5 – Now that’s what we are talking about!
Trade 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. Now 12.5-3.5= 9 profit Closing out for a tiny credit looks good but we might yet see a big tumble.

Trade 169 -Near or Next Month? Or Both?

I like the idea of selling near term theta. This trade only lasts a week so our exit is pre-defined.

selling 2 near term puts and calls and buying one in March

Here’s how it breaks down( at least in my head!) It’s a debit trade costing us 36.5+26.5- (8.5+9.5)x2= 27

Vol- we are selling biiiig 32.05, Deltas- short .16 long .6, so overall short 0.10. Theta– Yuge- 2.263

Risk?????? Around 7170 and 7520 are areas of interest.

Logic of the trade: We will own a March strangle- a put and a call that will be worth much more than our cost of 27 by next Friday. My gut tells me this may get a bit testy on the put side. We live in interesting times.

 

 

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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:

    Trade 169- paid 27……. now it’s 45. Anyone else making >50% in a day? Thought so. options give you wings to quote. Nothing else comes close.

  2. FFS says:

    Fantastic. I’ve been reading your posts since 1999 on the now defunct fool.co.uk site.
    Thanks for sharing.

    On this trade, the potential loss is quite sizeable, as it contains a naked call and put. How would you manage this trade if the index was at 7500 right now (20-Feb)? The short calls would both be ATM, with considerable time value.

    PS – what software do you use to model the P/L for a trade like this. I have Option Net Explorer, but it doesn’t handle the FTSE index.

    • Terrapin Trader says:

      You are 100% correct you do have a naked element on both sides, but given the powerful theta in this last week, premiums will be dramatically crushed for the short options.(Remember we SOLD Feb options and BOUGHT March) Say for example you found FTSE at 7520 at expiry- the short calls would be worth 20×2, but the long March call 7550 would certainly be more than 50. In extremes, you’d be looking to sell more options in the new month,and adjusting dynamically. FWIW I backtested this many years ago and came to the conclusion that in the last week FTSE never does more than ±3.6%.So, I placed a similar trade and FTSE went up 4%. That is a 1 in 200 event, and Sod’s law it would bite me. Back then I lacked the vision to see how I could adjust the position.I should have carried on with it.
      I occasionally use http://optioncreator.com/stuskul
      And ALWAYS use https://www.cmegroup.com/tools-information/quikstrike/options-calculator.html?utm_source=LINKEDIN_COMPANY
      When I post these trades I do only give a few minutes thought, I have my own rules andstrategies which do sometimes coincide with the posts here.
      Delighted to receive comments, always.

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