Can we break the winning Streak?
Now this is odd, and probably wrong, the FTSE wobbled around 6730- 6740 late Friday. The prices :135 for the 6750 call,and 145 for the 6750put.(January expiry 48 days away). With VFTSE at 15.55%. We are going to trade both the put and the call, and this is called a straddle. It describes the trade well as you are in fact straddling the underlying-or sitting on the fence, if you like. We could sell or we could buy. Long or short. Which strategy do we prefer?
Do the Metrics Make Sense?
Assume we sell: the premiums taken in for one 6750 put and one 6750 call= 135+145=280. (Same deal if we buy it, 280). In order to make money if we sell, we need FTSE around the same price in 48 days. We have theta ( time decay) in our favour, but volatility is not so great. Recently it has been 20%, and the higher the volatility, the more expensive options are. Sell high buy low-always. This trade is an ugly proposition as there could be large losses if the market exceeds the 280 point range. This trade at expiry loses money if FTSE= 6750+280, so risk is at 7030 to the upside,and 6470 to the darkside. If FTSE =6750 at expiry,we make 280 (this is academic as expiry is unlikley to be precisely at 6750). Along the way though,the market may go quiet,volatility drops, theta erodes values and we may see a good return quickly. Previous trades have conspired to do this.
Evaluating the Merits of the Trade
It’s wise to do the calculations,or at least have an idea what you are getting into. The ‘what if’ tells us this trade has unlimited loss potential. Or, you could simply choose a stop level according to your own comfort zone.
This trade requires margin in your account and might require >£15k
Here’s a View on the Market
https://goldstocksforex.com/2016/12/03/footsie-selling-pressure-2/
with volatility neither high nor low it’s not a nice trade- so let’s see where the market takes us-if it’s a quiet week this may make money but typically I’d be looking to get well over 300 in premiums this far from expiry. This trade has a modest safety net ±4% -you may wish to check a site like Yahoo for the monthly stats the swings can be up or down 10% but settling somewhere in the middle. As always do your own research-it’s fun and it gives you confidence in your own approach
Hi Terrapin, as you say not a great trade because volatility is relatively low and as I type with the market up, volatility has come down to 14.4%. The 6775 straddle is only collecting 253 in premium at the moment.
On Straddles in general what’s your profit target? 25% / 50% / hold to expiration?
Just noticed this is now tarding at 250 to close- 10.7% profit! I am seriously not doing this to wind people up, honestly.
I would look to take 25% within a week, I have to say
update 226 to close out -that’s a 19% return-actually it’s not as margin required might be more than the 280 taken in.However it’s £540 profit on a one lot- in 2 days. Annualise that Mr. Fund Manager!