Trade 28 A combo or Synthetic Long

Lacklustre Market Does Not Inspire

I am unable to get excited about any trades currently. Excitement was there none! To confess, I have my own Demons to deal with too. I placed a ‘boredom trade’ on Wednesday. This should have waited until after Friday’s Non Farm Payrolls. Did I mention I’m a rubbish trader?

The Lowdown on the Synthetic

This trade involves buying a call (7300 debit 14.5) and paying for it by selling a put (7050-credit 15). Entry cost,therefore, is a tiny credit of 0.5, plus the margin required for the short put. I’d be looking for a quick turnaround, as this is directional. FTSE closed around 7300 on Friday, and these options expire on 19th May.

Scenarios:

  1. FTSE goes nowhere- losses are negligible
  2. FTSE drops to  7050-losses are negligible
  3. FTSE drops <   7050losses start to mount
  4. FTSE goes up to 7350-7400– the trade is a big winner. Drink beer.

Assuming one of the above outcomes applies, we should be ok- the most unlikely scenario sees a loss-but how would you deal with it?

Trade Adjustment

Traders who know options  do not simply tolerate losing as an outcome -we can, therefore, adjust. Therefore  if FTSE starts to drop, we could take any number of steps to adjust those short puts.

  1. Close out, take a hit, and thus move on to the next trade. The long call may still have some value
  2. Roll down the put, selling the long call to pay for the cost
  3. Roll the put into next month, for level premium
  4. Sell a lower strike call to offset the put, by converting the long call to a short call spread. Example sell the 7250 call. Do any of the above.
  5. There is another cunning strategy but that is my own and not publicly available. You may figure it out.

Filed Under: StrategiesWeekly 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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