380 W/e 30Aug FTSE UP, VIX Down- Normality

That Was The Week Inflation was No Longer a ‘Thing’

The British Retail Consortium said prices of non-food goods were 1.5% lower in August than they had been a year ago. Food prices were up 2%, but this was down from July’s figure of 2.3%. But is this even remotely helpful? Prices don’t generally come down and according to stable genius Trump you can pay as much as 30, 50 or 100 dollars for a pound (454 grammes) of cereal! More to the point, you’d be hard pressed to get fish and chips for under a tenner. We are bombarded with tv commercials with reduced prices for hamburgers, as sales have, unsurprisingly, taken a hit.

We saw a lot of gnashing of teeth about the job numbers in the US, as they are retrospectively adjusted to the worst by 818,000. This is in addition to 300,000 downward revision. All pretty standard stuff but the first Friday of the month is still ‘non farm payrolls’ day, so we’re screen watchers from 13.25 UK time. In the past these numbers have surprised and caused huge swings. However the market does not like surprises but generally adjusts easily to the new situation. As traders, that’s one of the hardest things to do. So how did our trades do?

In the Inbox This Week:

http://sjoptions.com/unveiling-the-hidden-risks-of-the-112-options-trading-strategy/

This strategy is one that most of us with a few years experience under our belt have tried in various formats. The problem is it’s that deathly ratio of 3 shorts, to one long. Some while ago there was a hedge fund that did very very well with this ratio until, it stopped being fun, and wiped out the fund. Big rewards always come with big risks, so we try to keep it modest and manageable. (See trade 380 for some irony!)

In other news, not a recommendation but CMC are now doing options. This is a spread bet NOT an options trade, so be aware. However: https://www.cmcmarkets.com/en-gb/options-trading

Distraction Trades

ADA was $0.3944 now $0.3458

XRP was $0.6112 now $0.5686 Ripple still ahead of our preferred Cardano but revival fading.

DAX 2 wins 2 no entries, one break even nett 200 We find trades after 08:00 am and later. The no entries are where the rules are not met.

UK Gilts were £16.99 now £16.89 The fund that I use, like actual gilts, pays dividends at around 3.8% too

Legacy Trades 378, 379 and newbie 380

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?

Last week 121.5+69 = 190.5 minus 40.5+67.5= 108, give us 82.5 We took 84 credit so it’s not a disaster this week!

This week 130+ 43, minus 68.5 and 23.5 gives us 81 of course we wouldn’t expect anything dramatic.

Trade 379, Let’s Do the Theta Challenge

We will compare using near month versus far month, but as you can see the premiums are of course much more juicy for October. We will place a strangle – short call and put in September and October. And, all things being unequal in our world, we will see how nothing in options is linear.

Here’s the trade, a bog standard strangle we sell the 8150 put 33 and the 8500 call 31.5. ( September prices ) and October: 72.5 and 59 for the same strike put and call

In 4 weeks the September strangle will expire, it’ll be interesting to see if in cash terms, the October trade does better.

Now: Sept prices 18 for the put 30 for the call We took in 64.5, so a profit of 16.5

October prices 45.5 and 79.5 we took in 131.5 so a profit of 6.5 so clearly the theta effect in play giving the near month a big advantage. Sometimes, it’s good to confirm what we know.