Trade 64 Double Trouble Theta Creator

Trade 64 A Bit of a Frankenstein.

Our offering this week  is the sale of 2 near month puts while buying a wide put spread in the next month. A ratio calendar, with an extra short put.

Here Come The Greeks- The Two We are Focussed On, Delta & Theta

7350/7150 Mar put spread 35-18= 17. We  pay for this by selling 2x 7350 Feb puts at 8.5×2= 17.  Therefore a zero cost(margin required though)

Delta of 2x Feb puts= +0.1592, Delta of Mar put =-0.1762( ok there is also the 7150 Delta at +0.0916) Overall we are positive 0.0746.

When we sell puts we are selling negative delta therefore we have positive delta. All clear now? A long put with a Delta of 0.5 has negative Delta- it increases as the market drops. Positive Delta rises when the market rises. It’s a lot of double negatives.

Theta= 2xFeb puts =1.7052 Mar put=0.9531 (plus 0.6975 for the 7150 put) Overall theta as we have sold 3 options 2.4027-0.9531=+1.4496

Those Other Greeks

Vega=2.6934 against us Gamma 9 against us. Our position is not Delta/Gamma neutral. Vega?- well for me it’s the lazy metric (Greeks aren’t lazy!)-it lurks in the dark and only gets dragged into the equation with a big market move. I find it unreliable, personally. Rho? – in a coma

The Logic of The Trade

I think the market is rangebound/bullish with the odd dip here and there. The volatility curve, or smile is, for my money, negligible. Making near/same month spreads almost unworkable. The risk here is a major drop as our spread is worth a maximum of 200. Thus we are short 2 puts so we have risk below 7250,around 5.5% below where FTSE is now. Zero risk above 7350 of course and if the market keeps going up we will make very little (8.5?)We want the spread to get valuable after Feb expiry. And what if we sold that Mar 7150 put at a later stage? So many possibilities. ENJOY.

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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  1. Terrapin Trader says:

    Hindsight is 20:20 vision we know that but we have to take trades based on Friday’s prices as they are for illustration purposes only. This trade could have been placed yesterday for a CREDIT of 20! Yes life is unfair, but you can always add to your trade.
    The old adage of never add to a losing trade is the opposite for options in our experience. You take ina credit of zero and sudenly you can get 20, do it! Today the value of the trade is 7. So….even if you got a bit spooked by trade size you could take a short term view and close out the extra lots (or leave them and close out the original- a bit of humour here!)You think ETFs give you that sort of flexibility? Futures? CFDs? Options give you so much more.

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