Strangle: Not the Criminal Variety!
So….. let me explain.
This trade is a short strangle, we are selling the 6900 call and selling the6500 put . The name is sort of suggestive in that we are ‘strangling’ the index. We are selling BOTH sides of the FTSE- it was, at close of play at 6730-as in the ‘price’ in the calculator. The risk is quite high as the market’s recent high was over 7000 but the low has not been down to 6500. The trade has 5 days to expiry (10:10am Friday 18th)and return on capital will be about (margin=£1200, credit from sale of options= 7+11.5 @ £10 per point=£185/£1200= 15%). Risk, as was pointed out, and I failed dismally to state is UNLIMITED.
The Kind of Returns Fund Managers Dream Of
Who wouldn’t want to make 15% every month? And if you scale this up to a margin (cash in your account) of £25,000, you would be looking at taking in a credit of £185×20= £3,700. This does not take into account commissions. Run the trade to expiry and if it is a winner, you only have one set of commissions. Options are said to be abandoned when they expire worthless. No fees to pay. That’s a sweetener if you like to run to expiry- and nobody is cheaper than an options trader!
Where’s my Break even?
I don’t like to do this but consider you have a credit of 18.5 so if FTSE at expiry is 6918.5, or 6481.5 you break even. Index options are ‘cash settled’ at expiry meaning the call at 7, or 7p as they say, has a factor of 1,000 meaning it trades at £10 a point, just like the future. So, to be clear, we sold each call for £70, and we sold each put for £115. Let’s see where this is next week. We may have some fun if it goes horribly wrong- We can’t wait! Every expiry is like Christmas
Nobody has 6 out of 6 winning trades- so let’s see if the market tanks or gets the hots for Mr. Trump’s new model economic miracle. If this trade is a winner I’ll eat my hat or the calorific equivalent in beer!
risk to reward will be about (margin=£1200, credit from sale of options= 7+11.5 @ £10 per point=£185/£1200= 15%.
Oh, dear me NO. The above is either naive, misguided, or deliberately stated to give apparent huge returns.
MARGIN does not, in any way shape or form, equal RISK.
If the FTSE shot to 7100, the loss (unless closing out; at what cost?) would be in the order of £1800 – where then your risk reward?
No you misunderstand- this is ROCE-return on capital employed-the risk to the upside is unlimited in theory.
You are quite right. Thank you for paying attention. I was hoping to use this trade to illustrate how risk can be managed
when things go wrong.
However this trade and many others DO produce huge returns in terms of %age
Paul I have amended my text and thank you kindly for your diligence. I am not trying to sell anything, I am trying to be 100% honest-and making mistakes is just me being an idiot. I’m not a good trader and Ido not say hthese are good trades,they are an attempt to enlighten. I’d be very happy for the FTSe to hit 7100 by expiry as one of my own positions would gain nicely.In this example if ftse hits 7100, I will show how to adjust.
I will check back on other posts,and have no intention of misleading people.
Hmmm…..I had not realised that you were able to rewrite history so that your initial post.
In this case there is no great damage, though the statement is still not completely correct as ROCE is only as stated so long as the position does not move against you. If margin increases at any time during the life of the contract, ROCE will change. Also, given that a prudent trader will only allocate a small portion of his available margin to any single trade, then true ROCE is rather lower than that stated.
However, I have deep misgivings about a discussion forum where posters can go back and change things. You have no intention of doing so, I’m sure – but that’s not the point. The TMF “no amendments”, or the Stockopedia or LemonFool “5 minutes to correct typos” time window are much better in giving readers total confidence that all is kosher.
(For my own calcs, I use the strike price to calculate ANNUAL return, aiming for 20%+ on any single trade eg, prices from yesterday:
RDSB Dec 2000 puts. 33p. 32 days to expiry. Return =
Premium (in pence) times 1000 (shares per lot), divided by strike, times 36 (days in a year) divided by 32 (days to expiry), so
33 * 1000 / 20000 * 365 / 32 = 18.8%
This understates my potential return as it is unlikely in the extreme that RDSB will go to zero – but it works for me to throw up potential trades. And I always prefer to understate and overdeliver than the opposite.
Paul
But I can’t edit my reply, so that my incorrect 33p premium and subsequent calc is wrong…I was looking at the wrong price and it should be should be 56p and thus:
56 * 1000 / 20000 * 365 / 32 = 32.0%
Paul
Paul -we are on the same track, I had no intention of misleading anyone-I’ve been trading options profitably for 16 years. I’m not a good trader, and I’m an even worse author and proof reader,it seems. However I am passionate about options and passionate about an industry that sucks the life out of people’s accounts with bogus claims, outrageous charges for investment advice and appalling returns. Options, in my opinion, are the only trading vehicle that gives people a chance by becoming educated.This site is a stepping stone, a conduit to get people to find their own way. It sickens me that when it comes to money matters people are completely misled. Even worse they give up due to lack of information-such as prices being hidden to the public.
Thank you for commenting and showing a real trade,and yes margin can increase-I cannot find what effect the huge drop on Aug 24th 2015 had, but I think margin may have increased by up to 50%,and my broker had issued a warning about margin calls-something nobody should ever experience- I’ve never come close,thankfully. Naked selling is not for me.