That Was The Week- Optimism v Pragmatism. Lockdown v Unknown Risk
VIX and FTSE look uncorrelated this week but the US has a magic formula for money. Illustrated below:
Does this make FTSE cheap? Well, there are many factors, $ strength and the nature of our different economies and loose monetary policy. Here’s a cheery article from the left https://www.theguardian.com/business/2020/may/07/what-caused-the-economic-slump-of-1706-
While we can only speculate on a return to the early 18th century style of life, we cannot know how badly this state of affairs is being handled. Of course this is not our remit, we just trade options. Traders having an idea of where we are on an economic cycle makes sense, however. I like the idea of ‘velocity of money’ and this makes so much sense. Funds have gone into dead ends and created wage stagnation (austerity)while billionaires are coining it. https://www.thetechnicaltraders.com/m2-velocity-collapses-could-a-bottom-in-capital-velocity-be-setting-up/
Famously quoting ” I don’t make predictions and I never will” We just need to keep our heads, while the market may not.
FTSE on a PER basis is not expensive but we don’t know what shocks are in store, and perhaps even ±10% per month is too modest. Quite how the velocity of money can shift gears is unknown to me.
Options Without The Knowledge
I wrote last week of a certain trader who had a scattergun approach simply buying calls. While it’s easy to dismiss this as dumb in the extreme, it speaks to people who don’t know bear markets. The US markets have smashed up like a rocket in fine weather at Cape Canaveral. Who needs Black-Scholes? While simply buying naked is dumb, this intrepid trader thought about another look at cheap stocks in the UK. Could we try to emulate the alleged success of this approach? Let’s keep it simple and just look at a few possible movers. Criteria- random. Strategy call spreads.We look for 3-1 reward -loosely.
Glencore: 160/170 July call spread 6.5-3.5=3
BP 320/330 July call spread 11-7.25=3.75
I am certainly NOT advocating these trades as I have dim hopes for the market in the next few months but I will look at a few more over time. Based on nothing more than upside potential profit. And hope!
Legacy Trades and 173
Trade 171 The New Paradigm( Yes I called it Trade 172, call me Homer!)
We sold the 5800 straddle(put & call) and BOUGHT the outer wings, the 5650put and 5950call. Here’s the sum 181.5+188.5=370, minus the cost of the wings 136+104=240. We thus had a credit of 130. Now? 136.5 (from 134 last week) to close-we await our hoped for outcome.Now looking unlikely, though. Tiny loss 6.5
Trade 172- 19 Trading Days To Expiry- Now 15
We sold near month June 5600 put, buying July 5600 put but……. we also sold the July 5100 put. Debit 113.5-(49+58.5)= 6. Thus,theta is our friend and we have a sizeable chunk of leeway, as the July spread that we own is worth a maximum of 500. Currently the Jun 5600 put is 42, July 5600 put 96.5, the 5100 put is 40. So the spread is worth 56.5, our liability for the Jun put is 42, so we have a credit of 14.5, but…we paid 6. We are not here to get 8.5! We run this.
Trade 173
Pump up the volume! We SO like Trade 172 we are going deeper with 5800 jun/july put calendar, and again selling 500 points below: the 5300 July put. The numbers thus: 139-56.5 for July spread= 82.5, minus the short Jun put at 71. This is a cheeky 11.5 debit. We now have a basket trade! Riskier, yes with problems arising around 5550. Let’s see…
