OUTCOME- today the trade could be closed for 6.5
That equates to a profit of 275-65=£210 using margin of £1800(possibly an overestimation) =11.66% in 4 days.That is an excellent return, closing out early. A choice traders always have. I think this could run to expiry and close at a zero value with the market below 7150. Scale this up to a proper working account-minimum £20,000 and you are looking at some serious coin. You would be trading 10 options-known as lots. The trade commissions are not taken into account. A round turn (when you open and close the trade) might be anything from £1.80-£15 per lot. Many of us traders run our trades to expiry to save commissions. You have to balance this out with the missed opportunities.
Conclusion
What have we learned from this? Nothing really- anyone could have picked that trade. I was hoping it might get really horrible,but wait……. it did, I think in real time it may have hit a value of 40. I wasn’t watching as real time is not terribly important. My current reading matter: Flash Boys by Michael Lewis actually showed that speed was the enemy of the trader -but that is in a wider context. With options, traders like to have a price in mind. Over time you get a ‘feel’ for what price you should be getting and we have a number of metrics to help us. Charts. Volatility. Strike Price. The underlying and its relative levels- support and resistance. I have a rule of thumb about distance away in %age terms from the underlying asset. Thus if FTSE is 7000 I might go short(sell) at 7250 with 30 or so days to go. I do not usually sell ‘naked’ which means just short options, as I like strategies. In time we will show the good, the bad and the egregious. See what I did there?
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Margin- the money or assets that are required to be placed in your brokerage account,against which you can trade,using it as a surety.
This may blow your mind,however……
If you have upside risk like in that particular trade,you could add………downside risk and you most likely will not need to increase margin. In fact the market can only go down to zero but in theory could go up to ∞ (infinity-but no further!)
So…. if you took this one trade,and only this trade for the whole year, you’d make 11%.
Somewhat better than the 1% you’d get on deposit