That Was The Week, we had Tiny losses, Others Took Big Hits
Our August expiry trades had 3 small losses though 326 more than compensated, but we are NOT keeping track. Each trade is a secular event and the choice of strategy is a genuine effort to be profitable, otherwise it’d be disheartening in the extreme. In fact it would be like those disclaimers: 70% (insert any %age up to 94) of traders lose money. We are not perfect, we are not genius traders, just passionate options traders happy to share the good stuff.We have >90% success rate
The markets took a battering and from Friday’s drop from 7618 to this Friday’s low 7215 is a 400 point shocker. So what’s going on? The triumvirate of inflation, expected higher interest rates and China’s wobbly economy. FTSE is on a P/E of 12.71 which is cheap, and many market pundits have been banging on about how cheap the UK is. https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart S&P500 is on a P/E of about 25 which is a tad high depending on whose version you accept.
Point of Interest( pun intended)
Here the graphic shows last week and this week and the columns of Xs changed to a downwards column of 0s, denoting the move is greater than 3 ‘boxes’. So what you see is last week’s price action with the 3 Xs up to 7600, so when the index dropped below 7450, the column changes to the down direction. Sometime, while there is no indication of time periods, it’s helpful to observe price action, no noise, each box has a 50 point value. However it does suggest that we have hit 7200. 
Thanks to Investorsintelligence. Make of the chart what you will, does it say 7200 is a floor? We hope so.
Distraction Trades
ADA $0.2659
XRP $0.50516 Bitcoin has taken a hit and it may reflect in other crypto’s. Have they had their day in the sun?
DAX 2 Wins +170, 3 no entries
UK Gilts ….Was £16.22, now £15.95…. Time to buy?
Legacy Trades and 329:2.0 becomes 330
Trade 325 An Old Chestnut
In the absence of fair looking trades we go for a call ratio spread. Thus we have some directional bias and a fair chunk of mitigation if we’re wrong. We buy one August 7500 call for 57.5 and Sell 2x 7600 calls 27. Our cost to enter is thus 3.5 which is cheap as chips, and the logic of the trade? We have theta on our side by selling two calls against the one we bought.
HORRIBLE! However this is a gift as it gives us a chance to look at how to manage a losing trade, and to say we have options is an understatement.
7500 call 182.5 7600 call 112.5 = 42.5 LOSS
7500 call 197 .5 7600 call 121.5(x2) =45.5 still ugly
Previous Week: 7500 call 97.5 7600 call 46.5, 4.5 in credit
Last week: 66.5 and 23.5 x2 gives us 19.5 and we paid 3.5 in %age terms it’s off the scale! Fun run to expiry next week.
We didn’t run to expiry for big fat 0 we’d have closed out. Impossible to have predicted the disaster this week.
We can make the following choices ( trying not to say options!) Though this is not the sum total of ALL possible actions of course
- Do nothing, and as Price Headley says more often than not, you make more money sitting on your hands.Generally not a bad idea, but be vigilant.
- Roll the 7600 call to Sept, pay 112.5 for Aug7600 call sell Sept 7675call 115.5. Credit 3 Sept7675 Becomes 123
- Buy 7700 call, for 60.5 creating a butterfly, sell Sept 7800 60.5 Zero cost Butterfly= 18.5, Sept 7800 call=64.5
- Close out the spread for 70,buy the extant short 7600 call, sell 7750 call for 42 Zero cost Now 7750 call 43.5
- Close out the spread for 70, buy the extant call by selling a strangle: 7550 put 59 and 7700 call 62.5. This then gives us a’warchest’ of 70 with which to adjust. put=39 call 64 (looks the better choice so far)
- Create a 7700/7800 call ratio spread 60.5-28×2= cost 4.5 We now have risk at 7800, and a butterfly with max poss 100 reward (watch your margin as you’re now effectively naked short 2x 7800 calls. Now Butterfly 18.5 the short 7800 call 28.5×2= 57 (this also looks ok)
Trade326 Closed out for big win though the 7400 put would have made >100
Trade327 Time Flies( Yes that’s its name)
With a grateful nod to Gavin at Options Trading IQ. This trade is a short PUT calendar butterfly. We SELL the lower wing Aug 7700, buy the body- Sept7700 x2 and SELL the Oct 7700. Those prices: 95, 124.5×2, 154.5 our cost therefore is 0.5
What the hell you say??? Three puts at the same strike, different expiries, can it work? It cannot be run to expiry, I’m told so we look for a bit of theta to erode the August put. Assuming the relationship between the Sept/Oct puts doesn’t change too much this could do very well with manageable risk. For fun/curiosity plug it into: https://optioncreator.com/stuskul
Last week’s update: Aug 178.5 Sep 204 Oct 232 gives us a tiny loss of 2.5 In fairness I did not put any thought into the strike level and this may have done well also ith the right Calls. A quick check with 7700 calls shows this would have performed slightly worse.
This Week Credit 2. I think it’s been an unfair choice of strike,so we may try this again with OTM strikes, calls and puts.
Aug put 455, Sept 480(max) now 431. Oct 425.5. So, while we didn’t give this a fair run we will revisit. Those numbers now 880.5-862= TINY loss 18.5
Trade 328 Put Spreads, the Long and the Short
In conversation with a very smart, and risk averse trader, his research had led him to an interesting proposition. Seemingly the max theta is to be found in the 20/13 delta spread. Combined with TastyTrade’s 45 DTE(days to expiry) this is the optimum place for a short put spread. Let’s see the graphic:
We were a little late to the party but perhaps that’s fortuitous, given the drop this week. So the short put spread, selling the 7250 put (delta 20) and buying the 7100 put (delta13) gives us a credit of 16.5. Now I’m going to be Devilled Avocado here and say I’d rather go with a put ratio spread but it’s important to understand the difference. Margin for both trades will be required but fixed for the short spread and bigger and variable/possibly brutal for the ratio spread. A big drop would see the ratio spread in trouble but the ratio spread doesn’t get ugly until 6950.
Last week we saw : 39.5 and 24 ( started at 45 and 28.5) so the credit spread was a tiny credit of 1, the ratio spread took in 12, now 8.5 -early doors of course.
Now those prices: 7250 put 96.5 and 7100 put 52 so th straight spread is: minus 44.5 the ratio spread: 104-96.5 = 7.5 Tiny loss
Caveat: One example in a curious week is no indication of the differing merits. Every opions strategy has subtley different characteristics.
Trade 329 Sept Expiry Bonkers Calendar!
We sell the August 7500 put for 44.5 and buy the Sept 7500 put for 101.5. Looks bonkers, and it only wins if the Sept7500 put ends up worth > 57 . I have never done this but there’s no reason to think it’s the worst trade ever, and our risk may be modest if it loses money
Here’s the calculator:
Theta is the size of a house for the August put! We hope this is challenging and in £ terms we risk an unlikely £570, with unknown upside, but realistically it’s not going to make >100. I reckon it’s not going to lose £570 either, says my crystal ball. I shall be closely monitoring.
Expiry was 7245 so Aug put was worth 255 Sept? Best we could get was 300 after expiry. At close today 250.5 LOSER
Trade 330 We Don’t Take a Loss Lying Down
We carry on the position and break the golden rule: A calendar trade runs at best to expiry, anything else is a new trade. So let’s say we are in debit 255 we own a 7500 put. How can we redeem this position? MAJOR ALERT: We NEVER accept a big loss, we always look to mitigate this with a new expiry month. Here’s what we do: We sell 2×7650 puts, and buy a 7800 put. You’ve guessed, right? We now have a bulletproof rock solid 22 carat gold butterfly. Those prices for the 7650s we get 383.5×2= 767, we pay 528 for the 7800 put. Gives a credit 239, and our loss was 255. So, we are in a loss of 16, but wait………. we OWN a huge butterfly with max poss gain of 150.
Of course there’s no free lunch, our butterfly is currently worth 16 but Trade 329 cost 57 and we want it back!
Losses. Can we make good? We need the market to rise in the next 4weeks. Likely? Who knows, but our position cannot worsen, we are locked in safely.
For those new to options:
https://optionsinvesting.co.uk/special-edition-how-options-work-1/
https://optionsinvesting.co.uk/special-edition-how-options-work-2/
https://optionsinvesting.co.uk/how-options-work-page-3/
Contact: [email protected] If there is anything you’d like help with, we all started somewhere and yes, it can be baffling.
