327 W/e 28July Calmer FTSE and S&P500

That Was The Week FTSE Calmed Down- Do We Have Resistance at 7700?

Yet again we see the Vix scraping along the bottom, and as contrarians, we take this as a sign that it will revert to the mean, and soon. So, where is the mean? Historically it could be anything from 10-20. However this week VIX saw a very transitory blip up over Japan concerns which quickly abated. So, the sensitivity is not in question, but the US seems to be in the ‘Goldilocks Zone’ . Buyers seem to think there are no blips on the horizon and they have yet to be proven wrong. However we speculate, yours truly is always late to the party, and buying stocks is just a fun play. Like the old ‘stopped clock’ at some point it will be right, just like my terrible ISA. So perhaps the brains trust managing the ISA will at some point be vindicated.

The volatility drought continues and it’s so hard to find anything with decent risk/reward. Our aim is of course to place a new trade each week and so we defer to TastyTrade https://youtu.be/XKK50FHTELg and https://optionstradingiq.com . It’s a great privilege to be able to communicate with other seasoned options traders, and especially the great many who are smarter than me! We have these images as a result:

SEE TRADE 237- this had cost 6.5 to open

We will be revealing the relevance in Trade 327. In the interim it’s worth watching the Youtube link and I for one did not know about the actual CBOE index SKEW(skew is of course something we look for all the time). Tom leads the conversation with Tony and the upshot is: SKEW is high and VIX is low…. watch out! SKEW does not show as daily or weekly charts on Google, but it’s been getting higher over time. Please do your own research as there is scant evidence SKEW is a predictor of anything! It’s just handy to have these observations, and we will look for correlation in real time.

Distraction Trades

ADA $0.3090

XRP$0.70887 Ripple has roared back

DAX 1 win +200 1 loser -30 3 no entries A weird week

UK GILTS: £16.57 Was £16.63

Legacy Trades and 237 – a Freebie new strategy

Trade325 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

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 Upside Risk- Let’s Take on Mr. Market

In our volatility drought we are limited to boring calendar/ time spreads typically. We will go with a combo, a combination known as the risk reversal. We will sell a call to pay for a put. August expiry we sell the 7800 call for 28 and buy the 7400 put for 28.5. The logic of this trade is that with so much upside recently, one good down day could give us a healthy profit. Should FTSE decide it’s all clear blue skies, we can adjust, somewhat.

Oh dear…….. 28.5 and 16.5 loss of 12 we persevere

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