Options: Weekly Trade 1. Short Call, in a Rising Market

The above courtesy of iVolatility.com

Trade of the week- what is it? Short call.

I am looking at selling the 7150 FTSE call which expires at 10:10 am on Friday 21st October. Should FTSE be below 7150 at that point, this option will expire worthless. We can sell it for 27.5,which in real money is £275. (Margin required-cash in the account about £1800 a return of 15%). Is it a good trade? A good trade is one which makes money, the market will decide that.

So what are all those numbers?

Ever heard the expression ‘it’s all Greek to me’? ………Welcome to the Greeks

On the right;

• Delta -the rate of change relative to the underlying asset: 0.2675, or 26.75% which means it moves at that %age of the FTSE.
• Gamma-the rate of change of delta 0.0019 starts to get serious near to expiry, but 19 is quite high
• Theta- time decay. The option has no value other than time value-hard to quantify in £,but one could take it to be£21.85 per day
• Vega- sensitivity to volatility-we will discuss this in much detail in the future
• Rho-sensitivity to interest rate change-and interest rates might not even change in our lifetime.

On The Left

• style: European-means  no early exercise-this will be discussed some time later,but we like european style
• Price- 7040 value of the FTSE100 at close on Friday
• Strike- 7150 the level at which the option becomes’ at the money’ at expiry is has zero value if FTSE is<7150
• Volatility:12.84 -based on the underlying this determines how much the option is worth.

(At 15% the option is worth 37, with volatility at 10% the option is worth 15.75 )market closed,remember,this is academic,not dynamic pricing

In Summary

This trade will lose £10 for every point the FTSE is above 7150 at expiry-so we break even on the trade at 7175.5. Thus at 7250 we will lose £745.5. So what is the plan if it goes against us? We will leave this trade to run for now and update according to the market. Today we marvel that FTSE is still at such a dizzy height, given that FTSE is twice overvalued compared to its historical average ‘price to earnings ratio’ http://markets.ft.com/data/indices/tearsheet/summary?s=UKX.P:FSI I have no idea if this means much to anyone else, it is a personal take on the market but I always expect a   crash after my first foray into shares in 1999 and the subsequent plummet. Did I mention I’m not a great trader?
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