Trade77 A Flight of Fancy


Starting With the Hard Bits

What IS Trade 77?

I thought it might be fun to try and mix things up with a mutant call butterfly, expiring in May. You may recall a butterfly is a short spread and a long spread which has risk limited to premium paid. This would thus cost  85+12.5 – (36×2)=25.5. In my world….expensive! Why would we take this as a butterfly? We have a view that the FTSE will stay around 7500-7600 but may be really in a tight range from 7450-7500.

Here’s what this skinflint is going to do: buy one at 7450 sell 3(that’s three) at 7550 and buy 2 at 7650. Thus we have a mutant ‘fly or a combination of a call ratio spread and a short call spread. Thus you could leg in with a butterfly, then sell the 7550/7650 call spread.

Getting Your Head Around Options

Basic maths can tell us how the position overall  shapes up in terms of the Greeks:

Deltas 0.9857 minus 1.1253

Gamma 61 minus 81

Theta  3.3021(against us) 4.3077 in our favour

We are thus short Delta (1.1253-0.9857) = 0.1396, Gamma 81-61=20 against us, but Theta 1.0056.

The above relate to buying the 7450 call and 2 of the 7650calls, whilst selling 3 of the 7550 calls. All clear now?

Reasons For this Trade?

I’d like to say something like X∞≠ sin/ ∑¥øπ but I’m a bit dim,so we can illustrate this with the graphic below. These are not terribly ‘real world’ but serve very well to show  ‘expiry prices’. This trade, by the way costs 2, instead of 25.5. We sacrifice security as there is risk to the upside above 7600. I have to be honest and say about my own trading.  I have morphed and legged in to positions over time to reduce risk and cost, but I have never tried this. Not as an ‘all in one’ shot. Do I like this? Yes, because if the market does drop,then the most you can lose is 2. And I’m always alive to the downside

Of course we are not recommending anything, these are for educational purposes. We don’t sell anything, ever.

Filed Under: StrategiesWeekly 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:

    Curiously this trade now works out at zero, the 7450= 106.5,the 7550s= 45.5×3=136.5, nd the 7650s=15×2= 30. I don’t have to tell you any more…

  2. Terrapin Trader says:

    Ouch!!!!! I did NOT see that coming- here’s the outcome this week 274 176.5 x3, =529.5, 86×2=172 so we have 446 for our long calls but 529.5 for short calls= a loss of 83.5.And a debit of 2 to get into the trade….ugh!
    This is our biggest loss to date and salutory lesson. Trade 78 was safe however with a tiny credit of 3.
    This trade was and will remain a theoretical one as the huge market move has turned it into a very ugly position- maybe the strategyw was right but the strikes were wrong…..
    More homework required,and we can backtest but this does not look like a happy outcome-though next week could get bearish…..please?

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