Trade 43 It’s Xmas

Structured trade with………… further options

The point of our trading is using the flexibility of options to make profits and avoid losses. Simple rules, simple to execute. A multi leg trade like this is often referred to as a Christmas Tree. Visually this makes sense when you are used to looking at options chains.

What is the Trade?

The multi legs can give us a tremendous margin of safety and can give us some premium too.

We are using PUTS -as usual, due to the volatility smile. Sept expiry FTSE long  7150 @ 64,  short the 7050 @47 short  6650 @ 17.  Cost zero (margin required). Risk is at 6650 minus the value of the long 7150/7050 spread( 100) so we are bulletproof all the waydown to 6550. That is >10% below market. Another twist here would be to sell some further out of the money(OTM) puts at, say 6350 @ 9.5.

What is the Logic Here?

You can be wrong and not lose anything in scenario 1. The market takes a dive, you were right, and you make the maximum 100. You can take in further premium at any time should you wish. With the long 7150/7050 spread, you can trade any manner of puts below that, knowing if you are really wrong you have that 100′ in the bank’. You can sell any amount of premium,and close out at any time. Example-you sell some 6350 puts at 9.5 and within a few days they go to 2. Close out. Next week the market might give you another bite of that cherry and you may find them trading at 12. They may go to zero, but you don’t mind. You’ve made a nice profit, and kept your main strategy. The market has paid you to participate.

Why Not Just Sell Naked Puts?

Go ahead but when you’ve taken in 20 and those puts are now 300, who you going to thank?