Trade 92 Week Ending 10 August

Trade 92- we’ll get to that.

Meanwhile, yet again the market went absolutley nowhere-we closed UP 3 points, despite the crazy at the end of the week. The dumb money moved in,and promptly scurried away. Cryptos? who the heck is losing their shirt currently? I don’t get it-might as well wet a finger and use wind direcion to go long or short. Now, some housekeeping:

Trade 91 A Triple Twister

This was our calendar trade-or time spread, with a difference. We were using the ratio of selling 3 aug 7300 puts to buy 1 Sept. A bit riskier than usual, but do the math:36.5 – (7.5×3)=14 debit.

How Did We Do?

The August 7300 puts are 3.5(x3), Sept 7300 put  35. = 24.5. We paid 14. August puts were 0.5 on Thursday-we’d take that price with just over a week to go. Thus, worst way we’d close for a nice chunk of change on our stake (margin was needed too). Genius trade? Nope, just a typical day at the office for options traders.Smart traders would have closed out the 3 August puts for 1.5 and thus made 33.5-14=21.5. Nice. And remember that’s a cool £215 without remotely getting into a sweat. You would of course be trading this 5 or 10 lots, which would be over £2 thousand in a week. Just awful, I know-and it could make much much more.

That Was The Week

We saw up, down,tariffs, Tesla shorts getting squeezed,Turkish lira going down the proverbial. Copper on a downer. We had the Bank of England rate rise. Personally I had a nice couple of trades using the low vol to buy and then high vol to sell, legging into a couple of strategies. However, our(my) memories are selective and one quirk that has bugged me is the correlation between rising interest rates and  a bear market:

I’m not so sure- I recall 2003 and the market going nuts upwards,as did interest rates-see chart. Though it can be said every recession has been preceded by interest rate rises. Personally I think it’s relative. But, remember while the UK is a basket case, the USA is $20 trillion in debt, and the world’s 3rd most indebted nation ( of the biggies).

Trade 92

Can our insane run of winners continue? Is anyone paying attention, or is this creating enmity? I hope not, as these are purely for education-for better or worse. Somehow,we just never seem to get to ‘worse’ yet all these trades are 100% genuine based on real prices. Thus there is no intention to fail, but no incentive to win, we just seem to win >90% of the time with losers costing next to nothing.

Rule Based Trading

The wonderful TastyTrade entertain and research, for our amusement, and education.And for free. https://www.tastytrade.com/tt/home

They did much work on one standard deviation strangles on the SPX. One standard deviation(sigma) https://en.wikipedia.org/wiki/Standard_deviation

The premise is that you sell a 0.16 Delta call and 0.16 Delta put within 45 days to expiry(expiration in the USA) Thus it  would give us:

In addition research has also been done into taking profits at 25% and 50%-you do not have to run these to expiry. So one strangle would bring in 57.5=£575. You could close out when the total value hits £431, or £287,and relax for the next 4 weeks thereafter. Tempted? Well, the research shows a massive amount of success taking 50%, I recall. These positions are naked remember, so risk is at 7242.4 and 7957.5. That is a huge range, and the trade requires margin-maybe aound £4000.

Why Don’t We Like Naked Trades?

Risk, in theory, is infinite to the upside, but gets very ugly to the downside, as a big drop would see volatility increase exponentially. Margin increases, and you may find you cannot roll easily into the next month. Personally we do not like nakeds, as they can feel uncomfortable-and keeping our emotions in check is key. You also kick yourself when you could have got better premiums, by waiting or legging in, or with luck. However if you can handle the ups and downs,and manage these with cold logic, go for it. We will monitor this with great interest as we know it can work well,but the most you can make is the premiums taken in. You ARE the insurance company.