Mystery or a Monkey’s Wedding?
Some frivolity here. Many years ago a musician friend would refer to the local pasties(Cornish meat and veg pies) as ‘mystery pies’. Because,well, who knew what was in them? The other little piece of frippery- a ‘Monkey’s Wedding’. I’m told we use it to describe the British climate, due to the four seasons in one day effect. Something we thus know quite well here.
Business of the Day- The Trade
Caveat: I have not been on my game due to events this week. Therefore the data went a bit crazy. However, the principle remains the same.
This is a ratio diagonal*. FTSE = 7527. Thus we are selling 2 7350 June puts at 20.5 x2= 41 and buying the July 7300 put at 55. Therefore this is a debit trade. It costs money. Ouch!
What is the Logic, the Risk, the Reward?
This trade makes money by the short life( effectively 4 days) of the near month puts and massive θ (theta- time decay). Effectively meaning we are buying a July put with 40 days’ life for 14. My risk graph calculator is not being helpful. I think by experience any move below about 7250 in the next 5 days would see a loss. This could easily be mitigated. After expiry you must decide whether to sell the put that you now own. Or, sell a lower strike against it creating a spread which has zero risk. Or a number of other strategies that you like, given the conditions. Market goes up big, you might see your long put lose quite a bit. Would you take 100% or more profit? That seems the likely outcome barring disaster.
Caveat 2. *I cannot find this as a recognised strategy, margin would be needed to cover the one naked put and the short spread. Remember you are short at 7350, long at 7300: 50 points of risk.
today that trade? the June puts are 5 (x2=10) the July put=55-giving a value of 45
We paid 14 for this profit of 31. That equates to £310 per lot or around £2,000 margin thus a 15% return in a week.