We’ve Been Here Before
I hope I am forgiven for posting 2 such similar trades- 47 and 48. I do try to mix things up a bit. I also do try to find interesting trades that might have bizarre outcomes. To quote John Maynard Keynes: “The difficulty lies not so much in developing new ideas, as in escaping from old ones”. The old ideas are still working. There’s no reason to reinvent stuff. I will again, however, add a third element, or leg, to this trade. It may be noted also that in the interests of honesty, I have placed the trade in real time-12.20 on Friday. Prices at close: 51 and 28.5 but, at close: 17.5 for the 7050 put.
So, What’s The Trade Again?
It starts as a put ratio backspread -we SELL the 7250 put and BUY 2 of the 7150 puts. This is a debit trade, for a cost of 7.5. We could make it a credit trade- by selling the 7050 put for 17.5,so that’s a credit of 10. It’s then…………… a short butterfly. (Wings and a body). Personally I would not be selling the 7050 put unless it got ‘interesting‘. Try if you will, to calculate the Greeks for this position. Short one put and long two puts. How does Delta work in your favour? Theta? Vega?
Reasons for The Trade
As a pure ratio back spread, the trade benefits from a modest increase in volatility. As in the above calculation, volatility is pitiful. Here we have lopped a week’s time off the calculation(see expiration date) and ‘guesstimated’ volatility. What might disappoint would be that short 7050 put which suddenly is worth 42. That’s put a massive dent in profits. No pun intended. The trade that cost 7.5 however is now a peachy (74×2-107) =41. I’d keep my powder dry by NOT selling that 7050 put and thus shorting a butterfly.
Sometimes we have to take debit trades, as the reverse of this trade would make no sense.
It looks like the market is going nowhere so one choice with this trade which is now losing money, is to swap around and convert it into a regular ratio back spread. How? I hear you ask. We have to buy back the short put- 7250 currently trading for 42.5, and sell 4(four) 7050 puts at 4×14= 56.A credit of 13.5.We have doubled our trade size but margin is unlikely to be an issue. So we are now long at 7150 x2, short at 7050×4, which gives us risk at 6950. This is 350 points below the market, which is almost 5%. Nothing seems to phase this market, from war to crises to valuations. Everything is a bubble now.
Another choice might be to double up on this trade which is now worth about 3. We paid 7.5 initially so if we doubled our stake our aggregate prices is now (7.5+3)/2=5.25.
But which is best????