Trade 66 The Return of Crazy Vol or Realistic Pricing


 The Greeks and the Chain

Here’s the ‘skinny’ and a trade for the bullish,the bearish,the don’t knows(me). We are  buyers of the 6400 put and sellers of twice as many 6200 puts. We are thus rewarded with a credit of 20. You need to know firstly, where’s the risk? FTSE falls below 6000 in March. Could it happen? Who knows? But you have to think that a drop from 7800 to 6000, or 23% in a matter of weeks would be exceptional. Exceptional and beyond. I’d be looking into the abyss and thinking about emigrating.

Trade Analysis

So, we require margin as the trade is not 100% covered. I am surprised that the delta of the 6400 put is not far off 0.16 which is one standard deviation. We are experiencing a very skewed market currently,in my opinion. The trade is guaranteed to give us the 20 so long as the market stays above 6000, but we always have  a plan with options. Repairing trades is a skill vital to us in the options world.

Trade Repair

We had aimed to show the versatility of options with our previous 65 trades. But they were small losses or really good winners. No repairs needed. Now we are in the brown stuff, to coin a phrase. Repairing a ratio spread is the simplest of all. In this case we’d buy the 6000 put,which then makes our trade a butterfly and thus bulletproof. The trick here, however, is being able to pay for that 6000 put. Well-here’s a thing you could buy the 6000, and then sell some 5800s in March, or you could sell something else in April, May, June and so on.The decision thus comes down to this: Do I sacrifice opportunity cost*, or close out and look for the next trade?

  • When you roll into next month you give up that month’s trade choice, but, there’s always the call side.

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

RSSComments (4)

Leave a Reply | Trackback URL

  1. Terrapin Trader says:

    In my own personal trading I am underwater. As I have often said,and this is not false modesty, I’m a rubbish trader. Will the flexibility of options get me out of a hole? I hope so, but at least I was not one of these clowns who shorted VIX month after month,and now they face epic losses.
    Keep it manageable,take the pain with the gains,and to quote ‘Don’t Panic’

  2. It is wonderfull article
    Thanks for Sharing

  3. Terrapin Trader says:

    this would have closed out a couple of days ago for almost the whole 20 credit-sweeeeeet!!

Leave a Reply