Trade 44 Options Flexibility & a Variation on a Theme

Flexibility- The Options Advantage

While Trade 43 options are languishing in the doldrums, it may be time to think about the position potential. The concept is a ‘zero cost’ trade that profits to the down side. It was never intended to be a ‘quickie’ however. While a new trade might be OK with volatility increased, we can explore a variation to increase our range of profit.

The Trade as Was

We had:( September expiries)  long the 7150 put short the 7050 put and short the 6650 put. We are safe all the way down to 6550. With FTSE at the optimum point 7050 we make 100. What if we can increase that range to 200?  That’s £2,000 per lot. We can do this by buying back the 7050 for 29.5 and selling the 6950 for 22.5. Now we have a cost of 7. What if we sold another 6650 put for 11.5? We now have a small credit. But this is not really a zero cost trade. There is the ‘cost of carry’. Our cash could have been attracting interest. Yes, at a daunting 1%. Nevertheless it’s a cost.

What Is the New Analysis of the Trade?

Guess what? Our risk is STILL at 6550 we have taken in a credit of 4.5 and our profit potential has been doubled. How can risk be the same? We have 2 x100 put spreads in effect, so that lowers the 6650 to 6550. Let’s clarify that- we have 2oo points in the bank when FTSE drops below 6950. That is set in stone. Should the unlikely event happen and FTSE slides further, we are safe down to 6550 because this 200 adds 100 to lower the strike of each of the short puts.

What if We are Wrong?

The market may not drop. We are 100% safe, and we keep the tiny 4.5 premium. The 7150 strike was chosen as I like the 7100 area as support. Markets usually overshoot.

Filed Under: InformativeStrategiesWeekly 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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  1. Terrapin Trader says:

    Of course the market can go below 6550- let’s see,and if it does the volatility will give us plenty of juice to adjust/ roll out. This is what we hope for,to show the flexibility of options in the exit as well as the entry. and it is of course no problem to ‘leg in’ and out of any part of the position.

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