Trade 4 was a monster-you could have closed out for >60 on Friday- a whopping 300% gain. I am not trying to win big with these but to illustrate how trades work -right or wrong.
Trade 5 is based on a post-US election bounce, as the markets have been hammered recently.We buy the Nov 6950 call for 34, and sell the Nov 7050 call for 13. Meaning we pay 21 for a trade that can make a maximum of 100. Risk is limited to the amount we paid. The trade expires on 18th November.
IS This a Good Trade?
This trade may be terrible for the following reasons. Theta- the time decay at 3.5586 is greater for the 6950 call that we bought,than the 7050 call that we sold. Volatility-again we pay more(24.58 against 22.21), but the real interesting part is Vega.This is the option’s sensitivity to volatility, ponder a while to digest. Volatility is high(VFTSE=20.33) https://www.google.co.uk/finance?q=VFTSE&ei=IBjOVPhV59nBA4vRgIgK
So…..if volatility is high, and typically it drops when the market rises, we really do not want the option that we own to be more sensitive when volatility is dropping-and this trade needs the FTSE to rise. So at least two of the metrics are against us. Oh and then there’s gamma, slightly more in our favour. And…. Rho-no need to worry there as that is the sensitivity to interest rates, and nothing is going to happen there. While the Greeks are vital to our trading , we often have to trade based on the prices on offer, with a rough idea of the Greeks, while we take a view. Do I think I am paying a fair price? Based on my view, and time frame and expected return are the odds in my favour? Was there a better trade given the same view?
Trade choice is something we will discuss and has many facets- more soon
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At some point in the future we will look back at these early trades and reinvent them, using the prices of the time.
We aim to show how many different ways there are to take the same view. How to optimise the trade rather than trying to optimise ‘or curve fit’ to a trading system.
We will show how you can trade with defined or undefined risk so long as you are aware of the mechanics of the trades.
failed to look at yesterday’s prices but today after the bounce, the trade is flat at around 21-most unfortunate market action last week and hold the champagne for this week’s roller coaster. So -if you were expecting the bounce today,we may have had it and we’d close out for a small loss -commissions
at close the trade was worth 26- I can do no wrong!
Well….. today could have got about 45- >100% return- I thank you!
Seriously these are random trades and I pointed out why this was not a good trade-but it’s another chunk of evidence to suggest that even bad trades can make money with options. This is just a freaky market- I do not believe anyone is making considered trades-you cannot factor in all the unknowns,so had I taken this trade, I would have closed out for a very nice 45.