Trade101 Week Ending 12October

Oh My! Some Drop, Who Saw That Coming? Er, most of us, But Not That Big

The  drop since 03 October-  6.66% when FTSE was 7510 and it all looked ok. Warnings abounded- “bond yields!” They screamed, FED rate hikes they exclaimed. Markets drop from highs-only the fund managers buy at the top. The classic ‘they are buying we’d better buy as well’ syndrome. I used to experience this in my sailing days when we foolishly ‘raced’ yachts with a bracing top speed of 7 knots! Skippers asking-Who’s got the spinnaker up? What’s that boat doing ? Are they on the same course? As a mere deck hand this was all jolly fun without the expense of paying for broken stuff and ripped sails. Follow the herd at your peril!  I digress.

Trade 100 and a Timid Exit

So…. the entire trade- sold 7650 calls to buy 7350/7250 put spread. When market dropped I sold the 7250/7150 put spread for  a credit of 9.5 (if only I’d sat on my hands).I closed out for a credit 13 on Thursday, that butterfly is now worth about 6*. Perhaps I should buy it again-after all the market could smash up to >7150. So, anyway, the whole trade made 3+9.5+13=25.5. Which is ok given a max profit potential of 100. I believe I have previously mentioned that I am a rubbish trader. Options make me a genius. Anyway it’s a winner….again. Had the market smashed up above 7650 I did of course have a plan. I did not want unlimited risk up or down.

The Week

That was ugly- and I hope none of our followers got smashed to bits. Complacent put sellers may of course get lucky rolling into next month, but is a Santa rally on the cards? Since 2012 we had +0.53%, +1.48%,-2.33%,-1.79%,+5.29%,+4.93%. I don’t see much of a pattern in recent times- oh wait! 2 up 2 down 2 upWould you hang your hat on that? I recently joined a Facebook options page and almost to a man/woman they are just naked buyers or sellers, pinning all their hopes on direction. And yet they could get free drinks at the casino……..

Trade 101- What To Do In These Turbulent Times

Sometimes the low hanging fruit is hard to resist. High volatility has made option selling the weapon of choice. A November strangle for example  6400 put at 20 and 7300 call at 21.5. You do the maths- we have moved >6% in 9 days, and volatility is mean reverting, what could go wrong? Risk at 6358.5 and 7341.5. Volatility works on calls as well as puts-you really really don’t want to buy naked calls here. Spreads could be very good however, as might this: Another Butterfly. These make hay while the theta munches away at the body, and you aim for the nearest-the-money strike to be in the money at expiry. This is cheap as chips: October strikes: 7050/700/6950 puts.

Paying Small

The cost of this trade is 93.5+ 48.5= 142 minus (67.5×2) 135 = 7. Thus we buy one 7050,sell two of the 7000 and buy one 6950. Expiry is on Friday as we know, at 10:15 so we need FTSE at somewhere above 7000.Max profit =50- 7. Wanna get punchy? Try Trade 100* for a debit of 6, and you need FTSE above 7150. So a sharp rally could happen and the risk/reward is phenomenal £60 could get you almost £1,000.

Fragile Egos and The Market

So, an old broker of mine used to have a client whose trades often went wrong and he would say “They know it’s me,don’t they?” It’s easy to apportion blame and imagine some subtle conspiracy. I know a lot of people got spanked in this latest market drop, and I hope our readers have exercised restraint. It’s not personal it’s just business.

Filed Under: FeaturedInformativeLearnStrategiesWeekly 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:

    As a lacklustre trader I at least survive and make profits. A better trader would double the account every year, easily

  2. Terrapin Trader says:

    59 38 24 These are the prices for the 7050/7000/6950 butterfly. we pay 59 +24= 83,and we have the credit from selling the two 7000 puts 38×2= 76.
    So 83-76= 7- no change there-just keeping a weather eye on things…

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