Trade130 Week ending 03May

That Was The Week We Nearly Saw a 1.5% Move!

FTSE 7428-7380  VFTSE 10.01 -10.68

Statisticians tell us that 66% of the time markets go nowhere. You would not want to be strongly directional on that basis, it would make little sense. Options give us so many more facets to trading, we can adapt for all kinds of market conditions. Raging bull to roaring bear. More like maggots and mice, but that’s not sexy enough to massage large egos.

Politics again this week, as we had local elections giving the 2 main parties a bloody nose. The stockmarket does not care. Though one might factor in the huge amount of spending under local council control. That could be a market mover. Thus suppliers who are less than scrupulous may lose large contracts. Councils are beholden to outsourcing and some big firms picked up fat contracts nationally. Example- payrolls. Equity traders in such outsources may therefore want to sit up, as the gravy train may be derailed, when comfy old arrangements are reviewed by fresh representatives. We are filled with delight at that prospect. Nobody feels they get good value from their council tax. Though happy to be corrected……it’s just my opinion.

Enough Politics, The Sideshows Make Little Difference

Are we bothered?

A Twitter trader posed a question about his deep in the money trade. He had got it horribly wrong, but it was not yet beyond redemption. Putting your mistakes out on the internet is a brave, possibly desperate thing to do. Nobody likes to admit they have messed up. However with a little detatchment it was possible for some of us to offer elegant solutions. What did spring to mind was some research allegedly showing that trade entry was of little relevance, it was all about exit. Our old ally Van Tharp alluded to this. This is the empowering part of trading. We have no control over market direction, and TA/fundamentals are limited tools. Traders rarely factor in luck, but must surely play a part when randomness rears its ugly head. Exit matters

Gamblers like to play on when they are in a ‘hot streak’. And so it must be with traders who are consistent winners. Stick with what is working. By all means try new ideas, perhaps even have some skin in the game as I did recently and lost a chunk of change. Smarter traders might have kept it ‘paper’ and not real money!

Those Running Trades and Trade130

Trade 128–  7350/7450 call ratio spread/ butterfly(ratio= 22,(paid 8.5) the ‘fly= 29 paid (26.5)) and 7400/7300 put ratio/ butterfly: ratio= 9.5paid minus 1, ‘fly- paid 15 now 18) Small wins but we run them.

Trade 129

This is our quasi butterfly/ratio/calendar  We were selling 3 of the May 7200 puts at 16.5×3= 49.5. We were buying 1x 7250 Jun put 68.5,and buying 1x 7100 39. Cost, therefore was 107.5-49.5=58. Current prices? May 7200 puts=16, Jun 7250= 78. 7100= 42.5. Trade now worth 72.5.  (We sold 3 May puts remember). Again we see a fair profit but continue to run this.

Trade130- Selling the Odds With Call ‘Fly

May call prices for a butterfly. We can buy this or sell it for 161+29.5- (82.5×2)=  25.5.

strike       price

7200        161

7300        82.5

7400        29.5

So….we can sell this and have a credit of 25.5, or we can buy it,but our expectations are of course different.

  1. We buy the butterfly. So we need the FTSE to be >25.5 below 7400 and >25.5 above 7200 to break even
  2. We sell the butterfly. Then we need FTSE simply above 7400-25.5  or below 7200+25.5 to collect our max 25.5.                    So on the basis that FTSE, we believe, will be above 7400 at expiry, we sell the ‘fly.
  3. Worst case scenario- we buy and lose 25.5, we sell and lose 100-25.5= 74.5.

So, remember butterflies are simply a combination of a long spread and a short spread.

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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