Short Put Options.

[Tomo1980]

I've just been looking at IGindex pricing and see you can buy a JUN FTSE 4900 PUT with a price of 5/11

Now if I short this then at the IG minimum 2gbp per point then I stand to make a massive 10gbp return. :clap:

What danger does a trade like this face within the time frame leading up to June.

For example if I'm certain the ftse will not fall to this level is it a "sure trade" or could say a fall of 100 points during the next month see the price fluctuate enough to see a margin call?

I understand the losses are unlimited if the ftse fell below 4900 but the economics just aren't pointing that way at the moment.

Any advice on a trade like this appreciated.

Regards

Tomo

 

[Pi3141]

I'm not an options expert by any means, but I think the problem with chasing these small returns is that they seem like a pretty safe idea, but you need to bear in mind that when they go wrong (which they will because sooner or later you'll be caught out) you lose a lot of money fast. One mistake will wipe out all your past gains with trades such as these. In short, the reward just isnt worth the risk.

 

[Hoggums]

I've just been looking at IGindex pricing and see you can buy a JUN FTSE 4900 PUT with a price of 5/11

Now if I short this then at the IG minimum 2gbp per point then I stand to make a massive 10gbp return. :clap:

What danger does a trade like this face within the time frame leading up to June.

For example if I'm certain the ftse will not fall to this level is it a "sure trade" or could say a fall of 100 points during the next month see the price fluctuate enough to see a margin call?

I understand the losses are unlimited if the ftse fell below 4900 but the economics just aren't pointing that way at the moment.

Any advice on a trade like this appreciated.

Regards

Tomo

You need to look at the risk/reward ratio of this trade. The reward is pitiful given the risk you are opening yourself up to. Who knows what bad news might come out between now and 3rd Friday of June?

You haven't considered the margin this position requires. Short position on FTSE options uses up 25xbet size of your account - so you lock up at least £50 of your account while that bet is open. Using £50 to make £10 doesn't sound so good now does it?

Even if you don't believe 4900 will ever be broken - think about what will happen to your position if the market drops suddenly to say 5500. Volatility will spike, FTSE Vol may end up at 30+ (currently just over 13) - this will increase the price of the option dramatically - magnifying any running loss.

Also the option strike will now only be 600 points away from spot which if you look at Jun FTSE 5700 puts right now (600 points away) they are priced at 57.7 to buy. So you could be running a £115 loss on your £2 a point position looking for that £10 profit. Add on top the extra £50 margin required to hold that position open - you are poentially locking up £160+ of your account just to make your measly £10 profit.

Still want to open this position?

 

[Tomo1980]

You need to look at the risk/reward ratio of this trade. The reward is pitiful given the risk you are opening yourself up to. Who knows what bad news might come out between now and 3rd Friday of June?

You haven't considered the margin this position requires. Short position on FTSE options uses up 25xbet size of your account - so you lock up at least £50 of your account while that bet is open. Using £50 to make £10 doesn't sound so good now does it?

Even if you don't believe 4900 will ever be broken - think about what will happen to your position if the market drops suddenly to say 5500. Volatility will spike, FTSE Vol may end up at 30+ (currently just over 13) - this will increase the price of the option dramatically - magnifying any running loss.

Also the option strike will now only be 600 points away from spot which if you look at Jun FTSE 5700 puts right now (600 points away) they are priced at 57.7 to buy. So you could be running a £115 loss on your £2 a point position looking for that £10 profit. Add on top the extra £50 margin required to hold that position open - you are poentially locking up £160+ of your account just to make your measly £10 profit.

Still want to open this position?

Great post thanks.

That's what i'm concerned about. How much money it would cause me to tie up. I was looking at it from an experimental point of view to gauge the price action without risking too much capital.

I agree it's a crap return when you look at it as locking up £160 for a £10 profit but on the other hand where could you put £160 and get a 6.2% return in 4 months? Of course there is the risk that the ftse could drop below 4900 and the ultimate risk is £9800 if the ftse was to fall to 0.

 

[A Dashing Blade]

Would recommend that you spend the weekend going through this car-crash of a thread and watching what can happen when this stratagy is pursued.

Pay particular attention to the (nuclear) mushrooming of the gentleman's margin requirement where calculated.

 

[Pi3141]

Would recommend that you spend the weekend going through this car-crash of a thread and watching what can happen when this stratagy is pursued.

Pay particular attention to the (nuclear) mushrooming of the gentleman's margin requirement where calculated.

Im currently reading this now (Im on page 8), but there's over 200pages to read O___o'

Does Socrates option trades end in tears because of the 2007-08 financial meltdown?

 

[Pi3141]

Just read page 184.. wow..