Trade 85 Not Just ‘Any Old Iron’

Trade 84- Nothing To Report

With 26 days to expiry, Trade 84 is pretty much where we left it, so nothing to do but wait until we get near expiry. This is the natural cycle of events with options of course, where we use theta to our advantage. Time decay is no guarantee of trade success on its own, it’s all about risk. Good traders know where risk is, what they will do to mitigate it, and what they are comfortable with. There is nothing pleasant about being underwater with short naked options and a market that shows no signs of abating. We each have our own ‘discomfort zone‘ and max pain.

Trade 85 and a Judgement About The Future

Trade 85 is……. an iron butterfly. This trade requires some view of the market’s direction, or to be precise lack of direction. Should the FTSE decide to go on the rampage, the pain is not ‘so’ max as the reward is quite nice. The  iron butterfly comprises of call and put at the same strike being sold,and then we buy the wings. Thus it is a combination of a short call spread and a short put spread. Here’s the skinny:

Sell Put at 7650 =75.5, sell the Call at 7650= 115.5  we buy the wings- Put at 7550 =46, Call at 7750 =61.5 . July series means 26 days to expiry. Our credit for this trade : 191– 107.5=83.5.  Risk is limited to the max distance between strikes ie 100. But we take in premium of 83.5, so risk 16.5( 100-83.5)

Reasons For the Trade

We have seen a bit of volatility but price seems to get rejected about 7560(support) and 7780 (resistance). Somewhere in the middle is our hoped for ‘sweet spot’ and as risk to reward is really not bad for this trade, it looks ok. We may make an adjustment  if there’s a swing in either direction -this, however, is becoming as rare as hen’s teeth as trades so often seem to work out. Much as rolling into next month is not ideal, it can be your saving grace. We need to keep our nerve and our patience.