What Manner of Sorcery is This?
My prices and Greeks look a bit strange perhaps? Our trade is one that has made good profits in the past. So what is it?
It’s a Put Ratio Backspread
Sounds complicated, but in essence you’d trade this for direction. In this case and in all the times I’ve traded, it’s to the downside. So here’s an explanation. We are selling the higher value put, the 7150 for 48,and buying 2 of the lower value 7050 puts at 25.5. This means it is a debit trade for 3 requiring some margin. We have a short spread,with a further long put.
How Can it Work, and Why Do it?
Firstly, look at the Greeks: we sold Delta of 0.376, but bought (2x .2165)=.4330, giving us 0.0570 of Delta in our favour(negative in this case).
We therefore sold gamma 21, but bought (14×2)giving us gamma of 7. Remember gamma is the rate of change of Delta, so it helps us.
We thus sold theta 1.895, but bought (1.6459×2)giving us 1.3968 of theta-working against us. Remember when we buy an option we suffer time decay.
Here’s the juicy part- Vega sold 6.0713, bought(4.6931×2)=3.3149.
Forget Rho- interest rates are not going to change between now and expiry on 18th May.
What’s the outcome of the calculations?
Result- this is not the best looking trade, as the Greeks are not ‘bigly’ in our favour. But……… and this is a BIG but(make your own jokes) I firmly believe that Vega is the most awkwardly valued of the Greeks when looking for a volatility play. We only need a blip down to raise the implied volatility and that Vega will look like our new best friend. A blip down to 7100 would likely see this trade worth >40. I’d be delighted with that, how about you?
It looks risky as you could be faced with a short put spread costing 100. Yes you could-this trade has to be managed,but think of the flip side. Would you be doing the ratio spread? Would you be selling for a credit of 3? Not on your life- volatility is just way below the norm again. The only issue is the amount of time-we have <3 weeks for this to be a winner. However if FTSE stays above 7150 we lose 3, and live to fight another day.
I looked at June prices but you'd be paying (63.5x2) minus 93= 34. While profit to the downside is theoretically massive I'd be looking for low cost trades that you can afford to lose. Some people might sweat on the June trade and watch that premium cost dribble away. Enjoy, and watch this one daily
Valuable info. Lucky me I found your website by accident, and I’m shocked why this accident did not happened earlier! I bookmarked it.
Thanks for sharing excellent informations. Your web-site is very cool. I’m impressed by the details that you’ve on this website. It reveals how nicely you understand this subject. Bookmarked this website page, will come back for more articles. You, my friend, ROCK! I found simply the info I already searched all over the place and just could not come across. What an ideal website.