311 W/e07Apr Good(?) Friday for Bulls

That Was The Week Restraint Triumphed

Should we be concerned about political posturing? China is rehearsing the military invasion of Taiwan, Russia’s invasion of Ukraine continues. There’s a common thread here of despotic bullies, determined to make everyone’s life horrible. In the 21st century this atavistic behaviour has no place, we should be working together. The concern must be that this worship of despots has infected the world, and we see hero worship of right wing bullies popping up all over the place. This blog can only observe the necrotising of humanity. Enough said.

The ‘anticipated’ mass protest in New York turned out to be a damp squib, and hopefully the thorn in American democracy’s side will soon be removed. The world needs a stable America with a healthy economy. Recession and unemployment have real knock on effects and destroy lives.

Meanwhile, back in our cosy little world, we see vol sucked out of the market and another ‘brutal’ rise in the FTSE. Our trades here generally have a bearish bias and while they are far from our favourite strategies, current trades have not done well. In fact there is a case for simply taking the Tasty Trade strangle. 45 days to expiry .16 delta calls and puts. Run to 50% profit, rinse and repeat. But there’s no challenge there. We aim to educate and show as many strategies as are sensible for us retail traders. While using options combined with stocks/futures/ETFs can also perform well, the index is home of liquidity and simplicity. We don’t worry about dividends much, and while a handful of companies are the prime movers, there is a degree of stability. FTSE is fine for demonstrating the power of options and the profit potential of sensible strategies.

The Three S’s Single Stock Strategy

This popped up this week:BABA calls- $900,000 in call activity(not specific) presaged the rise in BABA stock from $86 to $96. Nice you say. Those calls? On 27th March went from $0.25 to $7.50. Personally I would not touch a stock trading at a p/e of 46, but there are some great stock pickers who make the serious money with options. In fact there is an argument simply to buy a call if one is convinced the move will be favourable. Our stodgy optionable FTSE stocks rarely do these kind of moves though BP has been on a tear lately 15% rise in 6 months).

Always happy to look at the chain for a stock if people are interested. Let us know if you have a view on a specific UK listed stock. Cash secure puts are a great way to buy a stock too, if you want to own a stock!

Distraction Trades

ADA $0.3885

XRP $0.51022 So Ripple is breaking way above Cardano, and there may be a reason why, but crypto …..?

DAX 3 wins, +160, one loser -30, one break even +30.

Legacy Trades 308 (won and we closed, but we ran it for fun), 309, 310 and 311

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. Yes, it made 100+

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 now a losing trade, so we know the Vol crush is what works, and after that expect the market meltup.

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

7400 straddle 354 and 10, 7200 call 547 7200 put 5.5 7600 call 168.5, put 26.5 Thus we have 364- (168.5+5.5) =190 a loss of 32 or (547+26.5) – 364( the straddle) gives us 209.5

Either way, once it goes outside the wings, it’s a losing proposition.

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]

*400 is the max value of the 7600/7200 spread, remember.

Now: April 7500 put= 15.5 May 7600 put 81.5 and 7200 put= 27 Gives us 39. Tiny loss 4 so far.

7700 apr call 91 7850May call 60.5 May7650 call 171.5 gives us 20 and cost 30

Trade 311 Spring Fever or A False Dawn? Time for A fun Vol trade……..This might hurt.

We note the following prices: 7600 May put 81.5 7600 April put 26.5 Anyone spot a crazy fun trade? Let’s sell the May put and buy 3 April puts with the premium (3×26.5=79.5 ) Gives us a credit of 2. Does this make any sense? The esteemed Price Headley has made the case for reverse calendar spreads when vol is very low and it is not unreasonable to expect it to have an up move. We’re going all in with a 3 x 1.Here’s the pro’s: we expect over the course of a year to see 51% up days. Currently we have 42 up days and only 26 down. Are we due another run down? I hate having to take a view as one way bets are not what we are about. However we need to show the good,the bad and the ugly and having an exceptional win rate is not as important as imparting the message: Options trading is the level playing field where we can be wrong and still win. (Not with this trade, however!)