Trade 11 This may be a Slow Burner

It’s a long straddle:

The above calculation shows the 7000 call and put and while a straddle strictly speaking is ATM ( at the money) this was based on closing prices for simplicity. We are not quite delta neutral where both sides would have a delta of 0.5.

However the volatility suggests these(85.5 and 96) are silly prices.

Cheap is all you need to succeed?

Just because something is cheap, that alone does not make it a good thing to buy.  For this trade to succeed we need volatility to increase or the market to move big. Looking back at monthly ranges since Aug, they seems to be around 300. This straddle is at the top of the range to date for Dec. There’s maybe a  chance FTSE will drop 150-and that might do.

Cheap Just Got a Whole Lot cheaper

What if we decided to finance this trade by selling some other options, making a short iron butterfly?(2 long spreads) We can do this by selling the 6900 put and the 7100 call. Currently priced at  58 and 43 = 105. The long 7000strike put and call (96+85.5)=181.5. We could reduce our entry cost to 181.5-105= 76.5, but…… our max profit is only 100 ( long strike minus short strike=100). Is this a good idea?

Let’s Do Something Dynamic….

What if we just buy the straddle,and wait for the market to move, and then see how the prices are for the 6900put and the 7100 call? We might get  quite close to a free trade if, say the 6900 puts quickly went to 120,(FTSE drops to 6920,vol blips up to 15.5) the market blips up and you sell the 7100 calls for 40,(FTSE=7080 vol=9) now we have a cheap trade with a great profit potential. Timing trade entries instead of going all in at entry is another way to look at our options. It’s also known as ‘legging in’.Or ‘morphing’