Who Can Resist a Green, Cigar Smoking Be-hatted Octopus?
Often a graphic can serve as a mnemonic, or aide memoire. In my case it’s just plain silly*. So….to business and a free trade. Nothing’s free,right? I use the term loosely for those of us who like to keep our account balance looking peachy. And our cigars Cuban.
Not Quite Eight Legs, Not Quite Free (see what I did there?)
4legs, 2 positions- a call ratio spread and a put ratio spread. I like to use the 2:1 ratio, but you can do 3:1 or even 4:1. I choose purely on price with no particlular view, to show that a trade can be zero cost. I’ve probably done this before. (Margin, is of course required selling more options than you own).
Here’s the Plan
June FTSE expiries-19 days to go. Buy the 7625 call @22, sell 2 of the 7700calls @11.5– result small credit of 1. Buy the 7450 put@30.5,sell 2 of the 7350 puts @15, thus a small debit of 0.5. Overall more or less zero.
What’s the Point?
Unused margin no longer sits, idly losing value. Thinking that the market has run its course, (or perhaps not) we are thus positioned for moves either way. We realise profits as the market moves above 7625, or below 7450. Risk? what about the risk? This is the interesting part. With both sides the result is we own some options and have sold more. Ponder anew. We therefore own a spread, and potential value, along with some short options. Our 7625/7700 spread is locked in should the market go that way.Thus the 7450/7350 is too.
Where is the risk?….7775. The puts? Risk at….7250. Understood?
Max Reward
With a market drop our puts thus give 100, or subsequently on a rise, the calls give 75.
* multi-legged trade-not so silly
I have rarely used the ’25’ strikes,always gravitating to the round hundreds or fifties. I don’t know if that makes any difference and it may be that we backtest using quirky strikes. That is very much in the pipeline.