310 W/e31 Mar All the Banks are Fine!

That Was The Week Vol Was Violently Eviscerated

What a turnaround, massive vol contraction as the FTSE soared skywards +3%. However we think it’s never a good look. So, is this a flash in the pan, or the start of another run at the highs? Of course, it’s the end of the tax year and volumes may have been increased by last minute cash going into ISAs. Yours truly wonders how many ISAs are in profit, as the tax advantage only works if you make money. So, one rule to suit the fund managers who consistently underperform. Only 35% beat the index according to some sources. We cannot help feeling this is a cop out as there is a fair chance ISA/pension pots may be worth less than the amounts paid in.

Politics,Economics and the Market

How much credence should we give the the messages trotted out by the BofE, Governments or the economists who touted a recession? So what is the real picture, and again how relevant is it to index options traders in the UK? Here’s something a little left field and a way of ignoring noise. Older traders will know what this is. Point and figure was used on the exhange floors as a quick means of recording price action. And it’s still pretty handy. When the price moves 3x the value of the box,(50) you go from noughts to Xs. And vice versa.

Note that price hit 8000 but did not hold above 8050, hence the reversal of the column to show the subsequent drop. However with only a quick foray down below 7300 maybe we can call that support, and 8000 is resistance. If you’d like to know more about P&F, you need deep pockets: https://www.harriman-house.com/authors/profile/jeremy_du_plessis/228 The books are not cheap but they are comprehensive.

Distraction Trades

ADA $0.3902

XRP $05059 Ripple is now worth a fair chunk more than Cardano which was our weapon of choice. Remember we closed out ADA at $0.44 having taken a biiig loss.

DAX Another surprising week, 3 break evens(+30) 2 wins 100 and 150 So can we find any correlation or causation? The quest for another unrelated instrument has ground to a halt, sorry to say

Trades 308 (won and we closed, but we run it for fun), 309 Up the Irons, and 310

Remember this is NOT our strategy but all power to its creator.

What is it? Oh you’ve forgotten. A trip through the archives will show we’ve used it before.(You do the search!) Here’s my understanding of the trade. You find the value of the ATM (7350) straddle 188.5 (calls)and 203.5(puts)= 392. Subtract that premium from the 7350, and it gives us the strike for our trade, but we always have a bit of wiggle room. So, we go with the 7000 level, which gives us premiums of 438.5(calls) and 3x 105 (puts) We SELL therefore, one call and three puts for a massive premium of 753.5 as you know in real terms this is a shedload of cash: £7535.00. Imagine FTSE expires on 21st April at 7000. We keep the bloomin’ lot. Now-do the hard yards (it’s not hard) and see where your risk is. It’s simply 4 short options at same strike

Now? 673 to close out, giving us only 62, so clearly we did the right thing and now have an idea of max returns. This is where VIX is a powerful tool, and the ‘triple top’ makes this apparent. Of course we can do our own calculations and see the change in vol of our positions. On the flip side, what trades would you consider with high VIX? That’s right most of them!

Trade 309 Sentiment =denial, let’s test that proposition. (I think we might see another plummet!)

We like the idea of….. oh wait. We don’t really like these things, but in view of the fact there’s no market moving news until Thursday, let’s see if FTSE vol will shrink further. And to save a bit of legwork here’s a nice explanation: https://www.optionsplaybook.com/option-strategies/iron-butterfly/

We choose the 7400 ATM strike and buy the wings at 7200(put and 7600(call). Gives us ( 147.5+144.5) – ( 85.5+48.5) = Credit 158. Worst outcome, the FTSE smashes either side of the wings- ie <7200 or >7600. We need a quick round turn. We need vol to drop off.

Worst outcome – it’s here! 299- 126= 173 Losing 15 so we will let this run, but not much hope of a turnaround. ( we never like these and would usually close out quickly, or not take the trade!)

Also looked at this with 7600 put and 7200 call– same misery! 229 cost, current value 216.5

Trade 310, a Diagonal Twist

A diagonal is a short option in April, the front month and a long option with a higher value strike in May, the next month, and here we favour the puts. Normally we buy the 7600 May put and sell the Apr 7500 put, but it’s rather expensive. In fact we have 130.5-43= 87.5. We have a litle more risk but we sell the 7200 May put for 44.5 bringing our cost down to 43 the max reward will be 400*-43= 357. We risk losing some or all of our premium if the market takes off skywards, and on the downside we have risk at 7500- 400*= 7100 and we surmise there is strong support at 7300. Thus we are delta neutral and theta works nicely for us. [for fun I am tracking an equivalent trade with calls, but its risk/reward is not as good]