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:
- FTSE goes nowhere- losses are negligible
- FTSE drops to 7050-losses are negligible
- FTSE drops < 7050–losses start to mount
- 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.
- Close out, take a hit, and thus move on to the next trade. The long call may still have some value
- Roll down the put, selling the long call to pay for the cost
- Roll the put into next month, for level premium
- 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.
- There is another cunning strategy but that is my own and not publicly available. You may figure it out.
