382 W/e13Sept FTSE Bounces, US Winces

That Was The Week

America winced, cringed and then pretended he’s normal. Yes, that debate, quite how anyone can think it’s a 50/50 race beggars belief. While we may decry the quality and predilections of our politicians we have nothing remotely as stupid and demented as the rt hon gentleman in that debate. Keep your pets safe, people!

So, FTSE crept back up a bit while in other markets the S&P up 3.38% the Nikkei up 2.17%( though Japan had another crazy week). We saw some crazy numbers- the £22 billion black hole in UK finances, while we had £23 billion sitting in unclaimed pension funds. Traditionally pensioners have voted Conservative and it seems that tradition remains intact, though a great many pensioners have no need of the Winter Fuel Allowance. I’m sure I’m not alone in wondering why on earth anyone would want to be in politics. Showbiz for ugly people they say, but that does a disservice to those representatives who have done the hard yards with advanced education while toeing the party line for years. We might want to count our blessings when we look across the pond at their version of ‘conservatism’.

Trading, not politics is our focus, but sometimes a weather eye on politics makes sense. https://www.bbc.co.uk/news/articles/c4gqgg4zdzlo It may be prudent to tuck away some protective puts for the Nov-Jan06 period in the US.

Also this, perhaps more relevant: https://www.ivolatility.com/news/3019

Weird Financial News of The Week

Ireland seemed to wave away €13billion see here: https://www.ivolatility.com/news/3019  I don’t know how they feel about it but 5 million people could each get a €2,600 windfall. How nice of their government to speak on their behalf saying they don’t want the cash!  This also serves to remind us that the world is awash with money. Pretty much every large nation is heavily in debt and inflation has given us substantial price rises. We cannot keep on like this, or can we? Nothing to see here, but the ECB cut its main policy rate to 3.5% as their economists may be panicking.

Distraction Trades

ADA  was     $0.3232 now $0.3551

XRP  was     $0.5276 now $0.5870     Ripple surging ahead of our preferred Cardano but these are both looking rangebound.

DAX  3 wins, 2 losers 1 no entry  nett +300 

UK Gilts were   £17.10 now £17.18   A boring week. The fund that I use, like actual gilts, pays dividends at around 3.8% too

Legacy Trades  378- 381 and 382

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?

Previous 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!

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

Was: 31.5+147.5 minus 12.5 +88=88.5  An ugly week for this trade

Now 106- 37= 69. (Remember this is a credit trade so the lower this number is, the better) Profit 15

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.

Previously: 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. 

Was : 66.5 (put) and 5 for Sept =71.5 – a loss of 7. October: 100.5(put) and 27  a small profit 4 (All a bit meaningless as theta will now pick up more quickly)

Now: Sept put: 16 and 3 for the call = 19, we received 64.5 so 45.5 a niceWIN!    October: 63.5 for the put, 35.5 for the call. We received 131.5 so, minus 99 gives us 32.5.  This simple example shows the power of Theta in the last days of the expiry cycle. Curiously it shows that if we’d done this as a calendar trade, BUYING the October strangle,  it would not be total rubbish. However the near term strangle has done much better, though both are ok.

 

Trade 380 Disregard My 1 1 2 paragraph, we Already Have 2 Boring Trades

Well this is fun but looking at ropey prices and 3 weeks to expiry, this could be nuts, but we  do a 3×1 ratio. ( What did I say about this? )

We buy the 8300 put for 43 and sell 3 of the 8100 puts at 14.5 x3 =43.5. Cost zero(margin required) Risk at 8000

Was: 8300: 147.5,  8100: 50.5 x3  A tiny loss 

Now: 8300 put  64,  8100 puts 10×3, gives us 34, we run to expiry as it could make up to 200

Trade 381 Vol has increased, so……. We don’t do the obvious of selling the farm

A combo, (combination or risk reversal) This is a quick flip: We sell 8300 call for 31.5 and buy the 8000 put for 30. Keen eyed observers will note this is bearish and similar to a short future, but as we show the deltas add up to 0.49 whereas a future has a delta of 1. However options delta is not linear, and it’s also dynamic. So effectively we have a half portion of short futures. It’s not a long term trade, theta is brutal so holding on for a market turn in our favour is not a good idea.

 

This kind of trade can turn ugly so has to be watched and a decision made if it goes against us. Will the FTSE rebound or drop?

Very quickly this turned into a loss 29-17.5= 11.5 on Wednesday. Note to self: This is NOT 2008 

Trade 382 Only 3.2 Trading Days to Expiry

We know that the straddle* is a horrible trade but what if it’s a calendar straddle? We sell the near month 8300 straddle and buy the far month (Oct) Gives us an expensive trade. Oct costs: 228, Sept: 106. So the near month should have massive time decay and give us an easy profit, right? We pay, reluctantly 228-106= 122  We could make ∞ and pigs might fly.

*call and put ATM(at the money)

 

For those new to options:

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Contact: [email protected] If there is anything you’d like help with, we all started somewhere and yes, it can be baffling.