Trade 58 Time and Relative Value

How The Trade  Looks:

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Why The Graphic First?

As options traders we  always always look at where the trade risk is. Reward is an unknown. Many traders talk about risk/reward on the assumption they will win trades. Statistically it is highly likely that anyone trading directionally will have a run of 10 consecutive losers. A ‘flash crash’ can wipe out a futures trader in a heartbeat. Probably less likely with forex, though the Swiss Franc had a bonkers day in 2015. We use a ‘risk graph’  for a very good reason. It’s not a ‘reward’ graph! We cannot quantify that until we exit the trade.

The Folly Of The ‘No Exit’ strategy

In the stock market it is a widely held belief that time and not timing are the keys to success. Buy and hold* has done well since the credit crunch, thanks to the largesse of the many, who unwittingly subsided the few. I refer to QE of course. The stockmarket may now be reasonably valued, but the nation’s debt almost equals GDP. We note household debt has NEVER been higher. Black Friday? It’ll be RED January when the bills come due. We like doom and gloom!

So…… What’s The Trade?

We created  a calendar spread:    BUY the  7400 straddle Jan 188(C=100,P=88)   Sell the 7400 straddle Dec  112.5(C=63.5, P=49) Debit 75.5

We’re hedged 1 for 1 but that is always imperfect. Volatility varies between months and gamma picks up, near to expiry, in the near month. Logic, therefore, of this trade? We paid  75.5 and the current month is  trading at 112.5. At expiry our Jan straddle should be worth at least that. We note, however, implied volatility for the puts is lower than for the calls. I am concerned, as it makes little sense. 

You don’t have a profit until you EXIT!

Filed Under: InformativeWeekly 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. zxcv64 says:

    Nice trade TP. This is effectively a double calendar – one for puts and one for calls. If the FTSE stays around 7400, this should be very profitable. The downside for calendars of course is the underlying movement. The further away FTSE is from 7400 on the 15th Dec, the less the profit.

    • Terrapin Trader says:

      yeah it’s going nowhere fast! Just tryiong to get people excited about options but the UK makes it so hard for us these days with data at £120 a month-when the entire worldoutside the UK gives away live data because they are not terrified of a few retail traders taking their gravy boat away.

  2. Terrapin Trader says:

    OK so another winning trade- currently can be closed out for about 96- so that’s a return of 20 on an investment of 75. You do the math. The oh so clever money managers have seen the FTSE up about 3% in a year- I’d really love their job! I’d only have to work for a couple of days a year

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