331 W/e25 Aug Erratum, Trade328 missed

That Was The Week There was a Glimmer of Hope

We are back to bad news is good news, buy the dip etc. PMI numbers were grim as the wider economy is showing signs of wilting. However that may have some effect on the BofE’s prospective rate increases. So once again the FTSE didn’t rise on anything other than a glimmer of hope. A view that as rates do not get raised it make the market more attractive, although the yield on FTSE is not bad. Though it remains to be seen if inflation is still the bogey man at the next BofE meeting.We take notice of this in terms of market moves but as for the effect on our trades(Rho) we don’t trade in sufficient size to worry much. Other Greeks may be more relevant!

Vix watchers will again see a disconnect as market moves still have not budged it much. We see a world of problematic issues, and it’d be somewhat facile to list them here, but far from least is the political mayhem in the US. Americans are resourceful and smart. Enemies both foreign and domestic seem to have fired up ‘dumb America’ creating very serious division. We in the UK may also have been unwitting participants as Brexit may not have been a good idea after all.

Real Inflation, Some Moderation

We may have modestly good news with the price cap on energy costs. There is an argument to say that we should not be such terrible consumers of fossil fuels. My supplier is allegedly selling me 100% renewables, but with the UK being less than 1% of the global problem, being a local hero doesn’t make an iota of difference. Perhaps we can persuade the big users to moderate things a little…….

Meanwhile, worth having a look at this week’s missive from John Mauldin https://www.mauldineconomics.com/frontlinethoughts/the-science-of-cycles

Seems we have a few years until the next crisis.

Distraction Trades

ADA $0.2587

XRP $0.52146 Nothing to crow about in crypto

DAX 4 no entries 1 win +50. Curiously a couple of times the signal generated entries at other times and so we missed 350+ points. Curve fitting is generally not a great idea and yet, if we had free auto backtesting we might find more wins that losses at other times of day.

UK Gilts £16.33, from £15.95 last week

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 putspread. 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.

Last week we saw : 39.5 and 24 ( started at 45 and 28.5) so the credit spread was a tiny credit of 1, the ratio spread took in 12, now 8.5 -early doors of course.

Last those prices: 7250 put 96.5 and 7100 put 52 so the straight spread was: minus 44.5 the ratio spread: 104-96.5 = 7.5 Tiny loss

Now: 47.5 and 21. So the straight spread is in debit for 26.5,(opened for credit 16.5) the ratio spread a credit 5.5 ( opened for credit 12)

One swallow does not a spring make, remember.

Trade 330 We Don’t Take a Loss Lying Down

We carry on the position and break the golden rule: A calendar trade runs at best to expiry, anything else is a new trade. So let’s say we are in debit 255 we own a 7500 put. How can we redeem this position? MAJOR ALERT: We NEVER accept a big loss, we always look to mitigate this with a new expiry month. Here’s what we do: We sell 2×7650 puts, and buy a 7800 put. You’ve guessed, right? We now have a bulletproof rock solid 22 carat gold butterfly. Those prices for the 7650s we get 383.5×2= 767, we pay 528 for the 7800 put. Gives a credit 239, and our loss was 255. So, we are in a loss of 16, but wait………. we OWN a huge butterfly with max poss gain of 150.

Last week: Of course there’s no free lunch, our butterfly is currently worth 16 but Trade 329 cost 57 and we want it back!

Losses. Can we make good? We need the market to rise in the next 4 weeks. Likely? Who knows, but our position cannot worsen much, we are locked in safely.

Now 173, 302(x2), 446.5=16 exactly the same as last week!

Trade 331 Futures Go Skywards After The Cash Close (7375 )

We have seen this before but does it presage a rise on Tuesday? Let’s get bullish and BUY the 7375 /7475 call spread(74-35) and sell the 7200 put(36) to pay for it, minus 3. Logic of the trade being that the next couple of weeks may be positive, and the trade could make 100 for a cost of 3. We reckon there’s support around 7250, but we are selling a naked put if things do go south, the call spread may not be a lot of help. Again we could have some valuable education with that.