I don’t Believe It!
That 7050/7000/6950 put butterfly- a possible buy for about 3.5, or a ‘leg-in’ buying the 7050/7000 put spread for 13. Well the prices now are somewhat depressing: 13,11.5,8. So legging in at 13.5 for the spread-that’s now 1.5, and buying the ‘fly -not so awful it’s now 2. A young broker once said to me.”Sometimes you have to give something back to the market” Ouch!
Lessons Will be Learned
How many times have we heard people in public office say this? Well, in the real world of outcomes, we cannot exercise that luxury too often. So what’s the lesson? What can we do to redeem something from this trade? Actually quite a lot. As a butterfly it might be as well to leave it to run as it only cost peanuts, but if we only opened with the long spread? We could: Sell the 7000 put(11.5) again, making it a ratio spread and reducing our cost to 2, but still leaving the possibility of the long spread being worth something at expiry. We could sell the 7050 put(13) leaving a naked 7000 put, again reducing our cost to 0.5 but giving us naked risk (or not with this insane bull market!) We could sell the 6950 put(8)-again reducing our cost to 5.5 and giving us the chance of getting something back with the long spread. We could sell 2 of the 6950 puts, turning the trade into a small credit(8×2-13.5)= 2.5. I hope you can see where the risk occurs.
Wither The Market?
Hard to believe the FTSE is at 7200 and while I think it is the dumbest thing since the last dumb thing, it is where it is. Normal service may not be resumed for a while, and when it is, we will not be crying,or talking about ‘lessons being learned’ we will know what to do. We did the lessons.
