Trade 7 A nice Little Earner

Terrapin Trader,

Reasons for the Trade & Why we Averaged in

You may recall the prices of those calls dropped allowing us to average in- I gave the average buy price of 15.75 for the 7000call. Today it hit 25, while the 7050 hit 14, the 7100 was 7.5. Whichever trade you’d chosen would have done well.             The ‘naked’ long 7000 call doing great business 25-15.75= 9.25. Now I won’t even attempt the %age gain here but for a stake of 15.75 you made 9.25. (it’s over 50% return in just 2 days)

So- it’s THAT simple

No it’s not-it can be if that’s how you want to trade. No need for stops, or a panic as you need to take 5 minutes away from the screen. I have a profitable system for futures trading. But-  if you’re away for 2 minutes, you’d miss the trade you waited all day for.(from 07:00am) We like to place an options trade and go do something else.                                                                       The market can come to us.

One Direction if that’s your sort of thing

This concept of averaging into a trade can be a great advantage. But, maybe you don’t just want to make this a straight trade. Supposing when you first saw those prices and you thought- I like the 7000call at 18.5, I like it even more at 13, and when the market bounced as we’d hoped it would, I SOLD the 7050 call for 14. I now have a 50 point spread for a cost of 1.75.       I like this trade as it cost peanuts with the potential for that 17.5 to become 50 and I have a few weeks to go yet as expiry is Dec 16th, and FTSE might be over 7050 by then, or even sooner. But wait! That’s not all-  let’s introduce the butterfly*, only briefly. This trade consists of 3 strikes- we own the 7000call, we sell 2 of the 7050calls, and buy 1 of the 7100calls. Cost of this? 17.5+7.5= 25 -(14×2)= 3.  Er,we just got paid to take this rather good trade-don’t let it mess with your head-it’s just a long spread and a short spread-you have zero risk and trousered 3.                                                                                                      *More on butterflies soon-it’s gonna be great

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

1 Comment

  1. The Butterfly- options are visual as well as mathematical- and we will get into some of the more exotic strategies, but the butterfly -think of selling the body and buying the wings.
    The risk graphs for these strategies along with the strikes are highly suggestive of the names. It will become so second nature you’ll start to construct options trades with random numbers-it’ll get weird I promise!

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