Trade 93 Week Ending 17August

What a Spikey Week!

Big old vol spike on Wednesday. 5 consecutive down days (long overdue). And…. a terrific opportunity to double down with whatever position you like! I think this is more like it, though we may be heading back to that magnetic 7650 level. What do I know about levels? We’ll get to existing trades, exiting trades, expectant trades. But the counter intuitive nature of options positively leapt off the page this week. That of adding to a losing trade.

Adding To the Trade, and Stepping Up

You ask “why would you do that?”  I respond with “because the reasons you entered the trade have not changed, but the prices are much better.” This is not the same as cutting your losses, this is more like pound cost averaging. Share investors might more wisely (if you must do this) buy monthly, thus buying at an average price over time. Investors thus limit profits but lower risk at the same time. We, however, increase risk and increase profits. Because we are trading well within our margin.

Counter Intuitive Trading

We previously mentioned adding to an existing position. Trade 92 7300 put was sold at 35 -this doubled, you could have sold more for 70 on Wednesday and then closed out on Friday for 40. We saw that the short calls went to as low as 7, you could have closed out,as they were sold for 22. Trade 91? Well of course the short puts went to 0.5, while the Sept long put as just stated went to 70. Trade 91 was a debit trade- it cost 14 to enter. 500% winner? Thanks very much.

Trading Spikes

Traders who watch volatility charts, know that high vol passes quickly. Thus we require some courage, but actually that is the wrong word. We are required to have a good understanding of our risk. Van Tharp, the esteemed trading coach always says we trade our ‘beliefs’ about the market. We don’t have anything as flakey as ‘belief ‘about our strategies because we have a plan. Increased vol means better prices if you want to adjust-for example rolling down. Vol is a measure of how scared the market is*. Smart traders know this happens at least twice a year and this can be a huge reassurance. We have a strategy that can accommodate a 6% swing, and a plan if we ever need to adjust.

* We don’t stay scared for long,do we?

Trade 93

Here’s our Sept call strikes from 7650 to 7750,settlement prices 3rd column from left. Fellow traders, options chains are by now, second nature it is hoped. Calls on the left, open interest the first column on left,daily volume next. You remember of course the massive call open interest for August at 7850 and 7900 strikes. The volume here is at 7700, so how do we play this? I like the call spread 7650 long,7750 short. Debit of 55.5-26=29.5. I don’t wish to pay so much, but a ratio spread might work well. We are buying one 7650,selling 2 of the 7750s. 55.5-(26×2)=3.5. You know that risk is at 7850 of course,and you know that is the high ± this year. I would more confidently open with the spread and look to sell more 7750s if the market moved up a fair chunk.

 

…………………………………………….Like adding to a winning position

Filed Under: FeaturedInformativeLearnStrategiesWeekly Trade Idea

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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:

    So, if you’d bought the spread, you could then sell the 7750 calls for 29.5 giving you a zero cost trade. The spread has increased by 6. As always with options there are choices and unlike other trading methods,there is no time pressure you DON’T HAVE TO take the trade, you can leg in, or leg out. You do have to start somewhere however, an if you’d just piled straight in with a debit of 3.5 you’d be looking at a trade now worth 6. A share trader would be thinking that’s a 70% gain! For us it’s nothing but in 2 weeks it might be worth 20 or more.

  2. Terrapin Trader says:

    if you’d just gone in as a ratio trade it would now be worth 7,and you paid 3.5…but it’s early days, this has another 29 days to give us a real win.

  3. Terrapin Trader says:

    trade 93 hit 11 but I think I missed the top-anyway another win. Zzzzzzzzzzz

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