Trade125 Week Ending 29 March Ex-Brexit Day


That Was The Week

We were supposed to leave the EU, at the moment we have no consensus on voting on which bits to vote on. I hope when I leave my energy supplier the process is a tad less tortuous. Voters on both sides of the ‘B’ debate are hacked off. This trader is hobbled by the political process. Although it’s a good time to check the strategy locker, and see what we have, that could profit from this situation. Oh,  hold that thought- we could now extend the wretched ‘B’ process for many months yet.

Looking For Clues, Does Politics Matter

When we look at the upheavals of the last 2.5 years, possibly least relevant is ‘Brexit’. The most potent? The FED- tightening by a miniscule amount in December. The merest whiff of this sent the market tumbling >10%. So quite how do we deal with this apparently bonkers scenario? Volatility is back in the ‘not-so-expensive’ zone. It may be time to trade with small debit trades. Buying spreads, condors, butterflies, plain and iron. Curiously it is not ruinous to sell premium when vol is moderately low as in 2017.*

The trick is, as always, to manage risk. It’s our money, remember (or our clients’ money),and we are not banks.

History- A Guide To The Future?

I recently backtested one of the strategies we use, for 2017. Despite the terrible premiums, the strategy, if executed according to the strict parameters, delivered >50% p.a. Personally I found it a horrible year(anis horribilis-thanks your Majesty). Any trader lacking the insights of this sort of research, would have traded minimally. However I do know the strategy works superbly in the high volatility periods, which is our bread and vegan spread. Brexit be damned-  we should ignore the politics, and trade.

Brexit and 2017

The weekly chart shows the effect from 2016-forex down market up proportionally more. Dividends at >5%

Lower blue line GBPUSD, Red line GBPEUR. A strong pound is not great for trade we’re told. I believe we’ve been on an even keel for a long while, despite the shenanigans.

How Did We Do With Running Trades ?

Trade 123……  Initial trade buying the  May 7000 put and selling 2 of the April 6950 puts-(28×2)= 25. The 6950 Apr puts were 44, the 7000 May put was 96.5, so we doubled up to give aggregate price of (8.5+25)/2=16.75. Now (16.5 x2) and 58.5 =28.5. This is Terrapin’s Law- double up on a ‘losing options trade’. So with our aggregate price of 16.75, we are now looking at a healthy profit of 11.75 on our investment of 16.75. That is a win.

Trade124:Wide winged butterfly Apr puts 7200(long) 7000(shortx2) 6800(long) strikes. Thus we have 116.5 plus 24.5, minus 2×7000 @53.5= 34.0. Thus we have a potential max profit of 200-24= 166. Risk limited to the premium paid= 34. Reluctantly I report a dismal performance as the ‘fly is now worth 59- (21×2) +8.5 =25.5 Now here’s a thing. Should we double up on this trade? Why not. We could take out profit from Trade 123, which is 2×11.75, which almost buys us another butterfly- alright! A debit of 2. Frankly I’d bank the profit from 123, but we have the luxury of the paper trade,so we can monitor both paths.

Please forgive last week’s typo re Trade124- stating the premium was 24 when it was 34.

Finally….. Trade 125

My own take on the chart action is that we could see resistance again around 7300/7350 but strong support at 7000-the low from February. I am drawn to the 7150/7100 put spread and 7400/7450 call spread.But…what to do? That is the question. The premiums on offer for the put spread 45-34.5=10.5, and for the call spread 28-16.5= 11.5. A total of 22. Devil’s avocado that I am I think we need to sell these. Iron condor- that  is what we have, and we risk 28(risk of the max spread 50 between strikes and credit of 22). Or….. would you BUY these spreads on the basis of a suspected big move either way? Only expiry can tell us the right answer.* Ruinous or not.

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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