That Was The Week Cracks Appeared Everywhere?
We are seeing more upheavals globally in the political realm than we have seen for decades. France, Georgia, South Korea grab the headlines but there are so many more. Republicans are still trying to claim bogus victories and the US election is such a shock it remains being questioned by reputable actors. We saw pretty much every incumbent party removed in a year of an unusually high number of elections. To quote the bard “Something is rotten in the state of Denmark”. The veracity of information is/should be automatically questioned by us all as the media choose to ignore anything that goes against their chosen idol. So, while politics is not our business, keeping a weather eye on the crazy is vitally important. No good saying ‘I bought a ton of calls and the market tanked’. You’ll get no sympathy here! So should we be prepared for a downturn?
In our world the obvious course is to buy a ton of far dated put spreads and we have so many ways to do this for little, or zero cost. Remember to look ahead in the options world. the smart money may well be trading 6-12 months and more, in advance. Our best friends are (no not pens!) options chains as here: https://www.ice.com/report/265
Take a look at open interest for Sept 2025 puts. See anything curious? A lot of action at 7800,7400, and 7000. Would you be buying puts there? What about getting a very cheap position with risk over 2,000 points below today’s FTSE? Ask me how!
In the Inbox
Well it’s not great news but https://www.investorschronicle.co.uk/content/f95bdbfd-59b2-5d40-adbd-99f17167d561, and this https://newsletter.smartbrief.com/servlet/encodeServlet?issueid=6E51D546-3EFF-4414-8013-8D3340BEC700&sid=65475148-9060-4EF0-93CB-8D4DF195EAAE
Both allude to the chronic debt mountains whose name may not be mentioned. Even at a local level, councils are going bust. Apparently a rough figure for UK debt is about £50k per person. Of course this ignores assets but we can’t start tipping grannies out of their multi million pound mansions, or putting children down the mines. Although……… kidding! Children are not assets………… (also kidding!)
Thanks to CME for this:https://www.cmegroup.com/newsletters/infocus/2024/12/week-in-review.html#key-takeaways 
A couple of points- Implied Vol is up but from a very low base, and looking at the longer term chart of VIX, there is a big gap up yet to be closed. Post the US election, Vol has drifted lower seemingly heralding a great degree of comfort with the status quo in the US. Do markets go up forever? If it’s 2003 -2007 it seems like it. The last meaningful correction was July- October 2023. So maybe a bit previous to suggest an unfolding decline. However if you’re looking for some downside protection, now might be a good time to look ahead. It’s also worth remembering we can trade any strike any time in the future( May 2035 seems to be the limit) You may be able to interpret open interest better than I.
Just One More Thing:
It’s worth bearing in mind, as options changed my life for the better and ‘risk’ is something we MANAGE, NOT something we avoid. The same as we drive on a motorway within the speed limit but do not tailgate.
Distraction Trades
ADA was $1.2104 now $1.0843
XRP was $2.4416 now $2.4080 Buyers still have an appetite for crypto. Bitcoin well over $100k
DAX : 2 losers, 3 wins nett: 170 Actually a royal pain to trade.
UK Gilts were £16.49 no £16.26. OUCH! This is based on the Vanguard ETF (not a recommendation)
Legacy Trades 389 unto 394
Trade 389 What Can We Do In Light of the US election? Get Back To Market Normality
The Xmas effect or Santa rally, is it on this time around? Most market watchers know about this and the markets generally rise as the numbers show the economies are doing ok. We will go with a CALL BUTTERFLY
Here’s the trade: We buy the( December) 8300 call for 40. We sell 2x the 8450 call 16 x2, and we buy the 8600 call for 6.5. Our cost therefore: 40+6.5 minus 32= 14.5
The ONLY risk here is our premium paid 14.5
Previous week: 30.5, 10.5(x2), 4. Gives us 13.5 Christmas is coming !
Last week 8300 call 88, 8450 calls x2 31.5, 8600 call 10 Gives us 88+10 =98, minus 63= 25 We’re in profit but it runs to expiry
Then: 8300 call 81.5, 8450 calls x2, 24, 8600 call, 5.5, gives us 39
Last week :8300 call 69, 8450 calls 14, 8600 call 2.5 Gives us 71.5 minus 14×2= 57 WIN Might be the sweet spot so we’d close out but run it….for fun. Remember it cost us 14.5 so this is BIG, though 150 is max possible
Now it’s 37 Told you to close out!
Trade390 Can we use Legacy Positions again?
Trade 387 leaves us those two spreads that we own, so we have zero risk and could run them, with one, possibly both making no profit. Or……….
We leave the 8300/8400 call spread for the Santa rally, it’s only worth 15.5 and could make 100.However, the put spread… we sell the 8200 put that we own, for a massive 168.5 and be buy in January the following put spread 8250 216, 8100 137, for 79. So we have a handsome profit(168.5-79= 89.5) still and another spicy calendar ratio trade. Our risk is at 7950 and nothing is set in stone. Santa may not give us the rally this year.
In summary we are long: Dec 8300 call. We are short Dec 8400 call Dec 8100 put. Long Jan 8250 put, short 8100 put.
Here’s the graph of the position https://optioncreator.com/strt35v
Last week: The December call spread 88-46= 42 (Remember we inherited this and run it for zero cost). The short put Dec 8100 37.5 our LONG Jan put spread 101-61.5= 39.5. In credit for 2
Was : December call spread 81.5-37.5= 44. The short put Dec 22.5, our LONG Jan put spread 8250put, 82.5, 8100 put 47.5= 35=12.5 credit
Now: Dec call spread = 69-25=44. The short Dec 8100 put 10, the Jan put spread 60.5-32= 28.5. Overall a credit 18.5
Might be prudent to close out the call spread for 44. Remember the put spread owes us nothing as we took in a huge 89.5 credit
Run for fun? Why not.
OK we would have closed out but now 34,5 for the Dec call spread, Dec 8100 put 6 Jan put spread 61.5-30= 31.5 -6 gives us 25.5
Trade 391
So, currently we have a long call butterfly, a long call spread and a calendar put ratio spread, shall we try something nuts? Let’s go naked with a strangle.
Here we SELL both a naked put and naked call. It’s not as bad as being naked in one direction and we have simple exit criteria in the event of a problem. IF the premium on one side trebles, we close out and create a new trade relative to the new market level. Tasty Trade have long been advocates of the 1 sigma strangle, which means using options with a Delta around 0.16. It’s simple, we have a plan we take in a credit of 45.5, so if the puts, for example, go to 73.5, we close out. Our loss is 18, we look to place another short put and possibly roll down the call.
Entry criteria? The levels are the most recent extremes of Bollinger bands, the Deltas are around .16, the premiums are decent and we are in the big time decay period <30 days to expiry.
Was 14 for the put and 15 for the call =31 We sold this for 46. So, we’re 15 to the good. Boring, predictable? Profitable? All three, mostly.
8000 put 6, 8500 call 7.5 WIN We’d close out and take the 32 nett profit We run for fun
8000 put now 3.5, the 8500 call 2 so still winning, giving an extra 8
Trade392 November fades (but the Weather Gets Weirder)
It’s now a choice between December and January expiries but with the holiday looming it’s 48 days away but only 32 trading days
This is NOT a recommended trade as entry criteria are not public domain AFAIK. Price Headley the acclaimed trader and author of many options books used to say the following: On occasion it is advantageous in a calendar spread to sell the far month IF volatility is skewed. A conventional calendar spread is simply buying the far month and selling the near month because of the time decay. Here we see higher volatility in the far month Jan (to be expected) and hefty theta in the near month. BUT, we have 2 front month(Dec) calls giving us an overall delta of 84-46= 38, or .38. In addition we have Gamma of 21×2 versus 12. This means if there’s a big intraday move in the next few weeks, the near month calls will move far more than the far month call. It needs a big rise.
The numbers here: 114.5 and 56.5 x2= 1.5 Credit
We have realistically a week or so for this to do anything and it’s purely for demonstration and NOT a trade I would take without more of Mr Headley’s knowledge. It may get ugly! ( I hope it does!)
Here’s how it went:
Mon: 59.5 x2 against 121
Tues:88.5 x2 ” 152
Wed:67.5 x2 ” 127.5
Thurs: 68 x2 ” 131
Fri: 43.5 x2 ” 105
Spot the winner? Tuesday! 88.8.5 x2= 177 minus 152, gives us 25 nett profit. CLOSE and be thankful! And yes, it got ugly by Friday. We’ll run it for fun. PURELY for fun.
Curiously we now have 88.5 for the Jan call and 24 x2 for Dec. Of course we closed out to avoid such ugliness.
Trade 393 End of Year Shenanigans
So, 9.2 trading days to December expiry, but it’s looking a bit ‘off ‘. Let’s speculate that expiry will be at 8300 and we honour our chums across the pond at Tasty Trade with a Jade Lizard. We sell a call spread and a naked put, BUT……. we should take in sufficient premium that if the market takes off we don’t lose anything. So it goes like this:
We buy the 8350 call 43.5, we SELL the 8300 call 69, and we SELL the 8200 put for 20.5. This gives us a nett credit of 46. Keen observers will note the short call spread can only cost us a maximum 50 (8350-8300) so the worst way to the upside we could lose 4. To the downside we have the credit 46, so risk at 8154. Not my favourite trade but so often we see these work out.
This week 46 and 24 for the call spread = 22, the 8200 put is 15.5. So, we owe a total of 37.5 against our credit of 46. Comfortable? Not so sure.
Trade394 Too Late for a Dec Position, so………
Risk ON! Let’s get spicy again and look at a very saucy 3×1. We sell 3 8050 puts and buy 1 8300 put. Risk at 7900-7950. Logic of the trade- well purely that the cost is 78.5 minus 24×3 =6.5. The reward is a maximum 250 and while volatility is low, after December expiry the juice will drop put of the Jan options, assuming no catastrophes.
I had wanted to demonstrate a classical Christmas Tree -buy one option, sell 3, missing a strike, then buy 2 further out but not as wide. Example buy 8300 put, sell 3x 8050 puts and buy 2 7850 puts. This would increase the cost by 13 x2,=26, which is ok, but a 500 point drop? We could, at a later date, get further protection that may be better value. We will run this hypothetical position alongside the 3×1
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.
