Trade72 Volatility Spikes Don’t Last

courtesy of VIX


Strangle- Naked, Mad, Bad and Dangerous to Know!

Yes, a naked trade ! Normally we would never go naked but this is for demo purposes, and is a volatility play. As the VIX chart demonstrates we had a low base then a bump up to around 15,then big spikes up followed by big candles down to 15. This is more like ‘normal’ trading conditions (famous last words). You can see previous spikes were fleeting. Now a VIX of 15 is not low but looks like the new normal.

The Options Mantra

Buy when vol is low, sell when vol is high. While VIX is based on SPX option prices it’s a worthy barometer for the UK market too. So….. we have high vol we should be looking at selling. Naked in this sense is not what we’d choose but this is a demo. We hope to show how we can use the Greeks in every way. Delta, the rate of change relative to the underlying, Gamma, rate of change of Delta, and one to watch near expiry. Theta- our friend mostly, and Vega the ‘ghost in the machine’. And in my experience an unreliable metric.

What IS The Trade?

In a nutshell:  SELL the 7150 call  @19.5 (230 OTM) and SELL the 6300put@20 (620 points OTM). Credit 39.5. Risk at 7190 and 6260

Observe the Greeks- it will be interesting to see how they work as market conditions change. So if the trade goes to plan we should keep all the premium. What if it goes agaist us? And well it might- we are holding near expiry. If premium gets big on us, we close out and look for another opportunity to ‘shift’ the entire strategy.

Are There any Rules Here?

I have been led to understand that if premium trebles, close out and think again. Thus if you took in 40, paid 120 to close, you are looking for 80 to get back on track. That is a tall order.

Filed Under: LearnWeekly 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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