That Was The Week VIX Woke Up, More To Come?
So, Fitch……… a ratings agency. The people we like to ask…. where were you in 2008 when dodgy mortgages were AAA rated? Fitch downgrades US debt, based on the numbers from 2018-2020 apparently. However this has had global repercussions and yours truly expected the $ to drop bigly against sterling. So, how did this make a FX difference? It didn’t, but stock markets seemed to have a bit of a hiccup. S&P down 2.33% this week, but it was at a dizzy height already. Our own fuzzy little friend FTSE dropped but had a small rebound. However FWIW futures are down going into the weekend. Volatility is certainly not screaming up ( market down) as reflected in put prices.
Recession, is it inevitable? So house prices have taken a tumble and in the US it seems people are not moving as they cannot keep the low interest rates if they change their mortgage. Yes, the housing market is the biggie and by a quirk of fate a graphic from 2020 served as a reminder of how stocks are bought and sold but corporations had been having a feeding frenzy.
Apologies I am not able currently to find an update of this but I think we can take something about stock buybacks(and selling) from this short clip: https://youtu.be/ZoKCCj2ChK4
Data, Views, Opinions…..
Funny how we think that us little guys have an effect on the market. Quite how anyone can be an investor (sorry I know that word is literally in our title) is a mystery to me! Sleepless nights? No thanks. For those of us who like all the peripheral stuff when we’re not looking at options chains, there is more than you can shake a stick at. Too much information. We love and hate it at the same time
Personally I try to understand the attempts to slow inflation, but we’ve just had a round of big pay rises. Because of inflation. Anecdotally we are seeing a greater divide between the rich and the poor.HMRC’s inheritance tax haul was the largest ever. Many folk having issues finding the best investments, and tax avoidance strategies, that tells me there’s an awful lot of people with accumulated wealth. So, recession or no recession? Do I need to point out that options trading is not market dependent? We keep our heads down, make consistent profits while all around run in circles!
Distraction Trades
ADA $0.2914 It’s grim in Cardano Land
XRP$0.62507 Ripple has surged ahead of our poor old flagging Cardano. In case you’d forgotten, yours truly lost a small amount and closed out at $0.44
DAX 5 no entries! This happended once before. You could argue the system kept us out of losing trades
UK Gilts U.K. Gilt UCITS ETF (VGOV) £16.45 was £16.63 the cruel effect of interest rates.
Legacy Trades and 238 – a fresh look at an old strategy
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
This Week:
7500 call 97.5 7600 call 46.5 -So it’s now in credit and we run it of course. I won’t address the possible choices now, but it seems the best choice was to do nothing and let Theta work its magic.
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
SMASHEDIT!!!!!!! Do I hear 80? 70? 60? Huuuuge WIN! I apologise for not updating this but since Wednesday this has been in profit most handsomely.
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
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.
Trade 238 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 are 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.
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.
