That Was The Week: China’s Economy Looks Shakier, The US looks Like It’s Gone Mad, and Wilko Wilted
Wilko, one of our high street must haves, filed for administration. We will yet again see our high streets bereft of going concerns. Locally we have a new ‘discount’ store B&M, and yours truly is not fully cogniscent of the delights therein. However, the trend of low price chains that crush their competitors seems to be the trend. The retail model is broken, as we once knew it, when Woolworths were selling all manner of things from hot peanuts to cover versions of pop music hits of the day. We lament the loss of our fondly remembered stores but it begs the question if they would actually thrive in today’s high street.Those Woolworths peanuts were seriously very salty!
Deflation?
China, ever the mysterious land to your scribe, seems to be in economic decline. Documentaries, and news reports comprise snippets of news about ghost towns, zombie companies, massive property development losses, and of course totalitarian governance. My own view is of Chinese people always seeming to be rather downtrodden yet enlightened gentle folk, capable of fine arts and gentle exercise allied with martial arts. And a huge military. Doubtless China is the origin of Covid it’s strange how the world accepted the inevitability of the pandemic. We accept China is the engine of something called ‘growth’, so it’s all ok. https://www.bbc.co.uk/news/business-66435870 See other BBC links too
America Civil War 2.0
Those of us who watch in horror at the events in America had more to digest this week. We need America. We need a balanced America, not an unhinged mob that responds to childish taunts, lies and vile insults from a man who has betrayed his nation repeatedly. My own prejudice after living in the US is that the Republican party are an abomination of self seeking right wingers, who have only ever won rigged elections. Republicans’ response to Trump’s mountain of legitimate indictments is to attack the president’s hapless son. I hope that by next year’s election, truth and common sense will have prevailed. We cannot have a ‘Disunited’ States. We keep a weather eye on events that move our market. Self interest aside, it’s a real concern as America is predominantly a decent first world nation.
What the **** Somebody Ramped FTSE Futures, Wednesday evening
Your intrepid trader awoke on Thursday to a screen of bizarre options prices where August calls were 30% more pricey than they should be. Puts of course showed the reverse. My broker told me he only looks at the futures and the prices correlated. I explained that while futures were up 1% or more, the cash* had not moved. Another trader who only looks at the cash, could not believe the prices. So maybe I missed the memo, but futures don’t normally get so out of wack, though there is always some variability due to dividends. This was something else. By Friday’s close things were back to normal. After the 4.30 cash close the futures drifted 9 points higher, standard. Of course I looked for the edge and the combination- selling calls to buy puts would have been monster, but I doubted my own judgement, and played safe.
I have NEVER seen this before and if it happens again we know what to do.
*cash is the FTSE100 the index as quoted as a CFD. Price is settled ±4.35, but the futures trade during the night.https://uk.investing.com/indices/uk-100-historical-data
Distraction Trades
ADA $0.2943
XRP $0.62972
DAX 4 no entries one loser!
UK Gilts U.K. Gilt UCITS ETF (VGOV) last week £16.45 now £16.22 Interest rates and a current distaste for bonds, ouch!
Legacy Trades and 329
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
Last Week: 7500 call 97.5 7600 call 46.5 in credit
This 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 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.
Theta destroyed this so no point runing to expiry.
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.
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.
This week we see : 39.5 and 24 ( started at 45 and 28.5) so the credit spread is a tiny credit of 1, the ratio spread took in 12, now 8.5 -early doors of course.
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 butthere’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.
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.
