Trade114 Week ending 11Jan2019

Sea Change or Another Bogus Blip?

FTSE hit 6600 at the start of trading in 2019, and has since bounced, as I’m sure we all know. So, what has changed? Is the ‘bad news’ priced in? I just received an email proclaiming how great it is for a stock investor, when the share price goes down– because the dividend is greater pro rata. Good luck with that, when your portfolio is down 20%, and dividends are predicated on improving earnings. However it IS a point of view some may be comfortable with. Long term=stopped clock.One day it will be right.

Personally I do not wish to be married to any trade or position. I see it not as trading but as dumb luck investing. 2009 investors were nursing catastrophic losses and in panic,closed out. Investors with the new money bought in at those lows and did well. All a matter of perception. However, who knew the world’s governments would stump up trillions of taxpayer cash to save some hapless banks? I now know to guard against this ‘mission creep’ and try not to short a market that has bottomed. Central bankers are all too eager to get printing. Politicians will trade off the future to look good today.

Current Positions- 112 and 113, in Credit and Looking For More

Trade 112? About 23 to close out-still early doors though. Remember it was a credit of of 33 to open. Trade 113 now about 2.5 to close out. So again a credit to open, but for 11.5. This may be a conundrum or even a curate’s egg- or the reverse of the ‘prisoner’s dilemma’ ( a no win situation ) We are in a win situation, but as part of this strategy we own the 6950/7000 spread in addition to selling the 7000 call again. Thus we have a potential to gain another 50. Of course it could go bonkers upside and we’d have to adjust, but look on the bright side, we may get out for a juicy additional credit yet.

Expiry week looms and yet again we may wish to run our trades – of course the Tasty Trade skewed IC( Trade 112) is for February series.

Trade 114 Looking For The Next Expiry

I could find no value in calendar trades from this week. Feb premiums are too rich for us to sell Jan (near month) and buy Feb (far month). I think the market is telling us something as volatility has dropped hugely. We should have been greedy when VFTSE=24. So let’s have a look at the chart and the underlying option prices. What do we fancy?

Hopefully the chart is clear. Our recent low of 6536 on 27th December might look to be support. We appear to be at resistance around 6950– this level seems relevant at least. We should not think the market cannot go above or below these levels. However, it looks like prices at these levels may have been rejected. In my opinion.

So-here’s a more interesting trade than naked selling, which we abhor. We are buying the Feb series puts 6800 paying 96.5 selling the 6700 for 68.5 and selling the 6600 for 48.5. Our trade thus gives us a credit of 20. We are buying the 6800/6700 spread and selling the 6600, so our risk is at 6500. Understood? Proudly owning the spread that is worth 100 if the FTSE drops below 6700 at expiry. We have no upside risk, especially if that ‘resistance’ is taken out, and we have 20 credit.

Logic of the trade – the previous low may be significant and even at 6536 we collect 64 credit on top of the 20 at trade entry. I like this, and while some may scorn the cost of the spread, we don’t mind sudden 2% lurches. We are at risk at 6% below market, and we have some serious wiggle room. Unlike the naked seller.