Trade 89 Nothing Like a Butterfly

Limited But Almost Assured Upside?

The usual media suspects are trotting out the usual line- earnings season, earnings beating expectations etc. I have no inside track but seriously?  Debt overwhelms any sort of growth. Why wouldn’t you borrow at 1% buy your own stock and make 5%? Company insiders know what’s going on but they can punt with someone else’s money. That’s a recipe for the perfect game. Who wouldn’t want to play that?

We Play Our Own Game

This week’s trade is again a ‘trade off’. I hate naked trades but love the idea of selling some options to pay for a strategy. Of course you can leg in and out with these, as you can with most of our trades. For the sake of simplicity we just take the trade whole. So the important info – and remember these are just choices, you may have a differing view. I am suggesting that based on the popular view that there will be upside, but limited. We’d like to catch some of that action.

 Options Chain- (Just the Calls)

This is the chain from Friday’s August FTSE options. Strikes are the column on far right, prices are closing prices from Friday- 3rd column in from the left.

Trade89 Buying, Selling and Range Finding

Here’s the ‘skinny’ once again for our trade using ALL calls.

We are long 7700 @47.5, short 7800@ 18.5, sell 7850@11 x2, = debit 7.

First and most important question: Where’s the risk? Upside above 7900. At this point the spread is worth 100 but so are the 2×7850s you sold. Max risk to the downside 7. Max profit 93(100- 7). Of course you could leg in, looking to sell the 7850 calls for more than 11. Thus you might get an almost free trade, if you had bought the 7700/7800 spread for 29 already. It’s important though, to understand the relative Deltas, and Vega. Theta is always a player at our table-it’s a given.

Market Smashes Up Again?

We will show how to adjust a trade like this if FTSE gets over its previous all time high. With the GBP in the proverbial doodie, it might happen yet! Would I close out early? Yes if the reward was good enough. Oh yes-and margin required too-calls can go to infinity and beyond.

 

Filed Under: InformativeLearnStrategiesWeekly 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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