That Was The Week. The Bounce Back Is Back
We’re told everything is peachy after the tumult of the previous week, it’s all good. Nothing to see here, no sir! America’s bigly index the S&P500 was UP 3.78%. Japan seems to have bounced back and the South African Rand is enjoying some days in the sun. It’s a bellwether for emerging markets, we believe. Inflation is tamed and the prospect of rate cuts looms larger. The flip side of this is the looming prospect of tax hikes in the UK and those of us who are fortunate enough to have savings, are concerned. Public debt is mountainous and needs to be addressed, this is nothing new but when rates are high, the government has to shell out more, obvs. Interest rates matter, especially with the prospect of mammoth spending. Pay rises are on the menu for train drivers, doctors and of course anyone else in public service.
Markets do not price in today or yesterday, they price in tomorrow and beyond so it’ll be interesting to see if HM Gov can spoil the party. The esteemed John Mauldin, who writes a free weekly missive we have cited before, talks about the ‘muddle through economy’. People are still angry about price increases along side the lack of housing, immigration and, well, you name it. However, this quote moved me almost to tears this week, from another esteemed gent, Yuval Noah Harari. What is the law of the jungle? …………………….. co-operation. The many strata of life from bacteria to Boa Constrictors to Bats rely on every other slice of life to survive. THAT is the lesson we need to take on board. Co-operation WORKS. Philosophy class over, but I hope you agree, this is genius. Against my bearish disposition, let’s hope there is hope. Muddling through is fine.
Options Expiry
Expiry was 8323 apparently. A very odd number but it’s low volume August, the heavy action is the quarterlies where futures and equity options expire. Typically we do run trades to expiry to demonstrate what would have happened, but we had elected already to close out 374, 375, 376 as they were good winners. 373 was an object lesson in what does not work, although it made a profit! It’s all there, below.
Ignore the Noise
Again this week the Point and Figure chart may have something to tell us, in its pragmatic way.
The column of ‘X’s has come back up to the level of the previous column of downwards noughts. Does this presage resistance at a key level? This is the link: https://www.investorsintelligence.com/x/charts/iichart?_S=NkRDDlL7vwut1IOUFIRr6kWxV54IeVX3TdCw397CgJbppeEz75LwxjB8wgTSUH67HZ4pO8j9zWjrmYicHPs
Distraction Trades
ADA was $0.3474 now $0.3312
XRP was $0.5885 now $0.5635 Ripple still ahead of our preferred Cardano
DAX 2 losers -30 x 2, 1 break even +30, 4 wins, nett 220
UK Gilts were £16.97 now £16.93 It’s not an attractive instrument but hey, …………………. someday ! That day may be here sooner than we think
Legacy Trades 373, 374, 375, 376 and new trade 377
373 Short Put, Covered Call
Both trades were winners but the drama was too much!
374 Summer Madness ? GUTS v Strangle – Sounds like a Horror film!
Following the success of our previous GUTS trade ( both sides are short options in-the-money) We fancy comparing the dynamics of the two strategies. Both take in premium, with the expectation that this will go to zero. So for the GUTS we sell the 8350 put and 7950 call but for the strangle we sell the 7950 put and sell the 8350 call. See what we did?
Run to expiry both trades WIN 62
Trade 375 Is FTSE On The Up Escalator?
Let’s get fervently optimistic, and my bias be damned. We go with a call ratio spread and this is a low cost way of getting long with some risk. Our trade means buying nearer the money at 7300 and selling 2 calls further out of the money. We use August expiry: 8300 call 72.5, 8400 call 35.5
Where’s our risk? 8500 to the upside zero to the downside. What’s the cost? 72.5 minus 35.5×2. =1.5 Debit Bear in mind the volatility ‘smirk’ of calls ( vol decreases the further out of the money we go). However there is a small ‘premium’ here 10.14% vol for the 8300 and 10.18% for the 8400. This is unusual and may reflect unbridled enthusiasm. We would not expect to get a credit for this, however. This will go into a credit quickly as our 2 short options have almost twice the time decay. Oh no it didn’t! Volatility has gone from low to high
Last week 34 and 16 (x2) =2. However it has fluctuated from small loss to small gains during the week.
Now: 11.5 and 3×2 = 5.5. We paid 1.5 so nothing ventured etc. Hang in there? Close out for peanuts
Expiry at 8323 but the high on Thursday would have given us a profit of about 50
Trade 376 Calendar Time?
Hopefully our readers understand the concept of the calendar spread: SELL the near month options buy further out in time. Typically we use the current and next month.
We return to the 3 x2. However while the strategy is to buy 3 near month(Aug)straddles and pay for it by selling 2 far month(Sept) straddles. Here’s the problem: THETA
We are going to be Devil’s avocado here and as the theta is so great in the August straddle we will sell 3 of them (187×3)=561 and buy 2 Sept straddles ( 316.5×2)= 633
Cost 72 and we reserve the right to disclaim this is any way decent trade, it just seems like a couple of quiet days will crush the volatility and theta is brutal on the August options.(LOL!) It will demonstrate the quirkiness of all the options properties. I was very concerned after Monday’s shocker!
Those prices: Aug 46.5 and 76 (x3) gives us 367.5 Sept: 146.5 and 142.5 (x2) gives us 578 Pure Luck? BIG WIN 210.5 -72= 138.5 Close out
( Run to expiry would have given us 264 (x2) minus 148(x3) = 528-444=84, We paid 72
Trade 377 New Month/ Near Month
This looks like a simple guilty pleasure- combining spreads, time and theta. It’s a modest trade as we don’t assume the market is back into risk on mode. So here’s the trade using last knockings of August selling the 8000 put for 20.5. We balance this with a protective 8100/8000 put spread in September. We buy the 8100 for 113 and sell the 8000 for 83, a cost of 30. So the maths professors will see we pay 30 but take in 20.5 for the August put we sold. Cost 9.5 max profit -the value of the spread 100- 9.5= 90.5
This week: Cost 9.5, now 37-25= 12 WIN! Actually it’s barely a win, and if anything it’s quite annoying but during the week you might have got 30. Any fund manager would be bragging about a 26% increase of course!
Trade 378 Cheap as Chips
Ugly trade, and honestly it’s not in my recommended playbook, but in this low vol market we need to be careful with risk. This trade is the iron butterfly, and ‘iron’ means you are using both puts and calls. A butterfly is either calls or puts.
Here we see the prices for September: 8200 put, 57.5, 8300 put 89.5, 8300 call 127, 8400 call 75.
How does it work? Typically you would buy the ‘wings’, the outer strikes, and sell the body- the at-the-money straddle. So the wings 57.5+75= 132.5. The body 89.5+127= 216.5.
Thus: 216.5-132.5= 84. This is a credit the trade pays us and worst way it can only be wrong on one side. Example, FTSE goes to 8000, the spread between the 8300 put you sold and the 8200 you bought, is 100. ( we took in 84, remember) We risk losing a maximum of 16 to get a maximum profit 84. We need the expiry at 8300 -what are the chances?
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.
