Trade 46- 3 Legged Calendar Ratio Something

Terrapin Trader,

Those option calculations courtesy of CME http://www.cboe.com/framed/IVolframed.aspx?content=http%3a%2f%2fcboe.ivolatility.com%2fcalc%2findex.j%3fcontract%3dC1F2E16A-170A-4DE8-B06B-C41A0EA401C6&sectionName=SEC_TRADING_TOOLS&title=CBOE%20-%20IVolatility%20Services

Trade 46 A Far Dated Spread With Near Month Shorts in a Ratio Stylee

For anyone who thinks I’m obsessed with puts…. you may have a point. I just like the way they move in tandem with the market. The more it drops the greater the price. You can buy calls in a high volatility environment, be right on the trade and still lose money.

The Nuts and Bolts of The Trade

We are selling 3 of the 7000 sept puts to buy a 7300/7200 put spread in October. The reasons for the trade? It seems likely that the 7000 level is fairly safe for now so selling at this level might not be such a risk. Secondly the spread we are buying offers some protection(100) to the downside.Risk is therefore at 6966. Time decay (theta) is working massively in our favour. Remember when you buy a spread the time decay is hugely reduced.

Delta 0.0536 against us Gamma -9  Theta +3.0595  Vega 2.6097

What do the numbers actually mean?

Delta(rate of change) is tiny-  Gamma (rate of change of Delta) is moderate, but Delta is so low it is not much of a threat. Theta is huuuuuuge. We like that. The options we sold are eroding quickly. Lastly Vega( sensitivity to change in volatility)Vega is small.We still seem to be in a very limited volatility range. If we are to believe the pundits,the market is healthy.

Our Ideal Outcome

We would like to see the market drop. Even if it stays at this level, the 7000 puts expire worthless. Our long spread will be worth something. Max profit 100(£1000). Risk at 6966.Cost of trade about a fiver, plus margin. We need to chill for the next 2 weeks.

 

Published by Terrapin Trader

First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

2 Comments

  1. hope the calcualtions are clear enough for people to understand- I have done the end result based on the logic of owning the 7300,then short the 7200 and the 3 sept 7000 puts-I have thus sold a total of 4 puts for every one that I bought. Any mistakes in the calcs are due to ineptitude

  2. at expiry this made 53.5. We could keep the long spread or just close out leaving us free to trade something else. No problem having multiple positions though,and optimising your margin.

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