The Short Index Strangle - Follow Up
Taking a Look at the Short Strangle Trade Idea
Four weeks ago today, we published a short strangle trade idea (The Short Index Strangle) which was based upon the FTSE staying within a defined trading range for a given period (Selling a 1 Lot August 2022 6700/7700 Strangle for 110p). The purpose of this trade was to take advantage of higher than usual volatility, using historical analysis of the FTSE chart to structure the trade.
Let’s break this down.
At the time of initiating the trade the FTSE Index was trading at 7300.
The image below explains the original trade details:
Short Index Strangle
The Index is currently trading at 7300.
A short strangle is executed by selling an August 6700 Put at 77p and selling an August 2022 7700 Call at 33p.
The net credit taken to enter the trade is the maximum possible profit of 110p (£1100 on 1 Lot)*.
If you were to close this trade today, by buying back the strangle for 14p (£140), you have would have crystalised 87% of the full profit potential in just 4 weeks (£960 out of £1100).
The FTSE Index is trading at 7338, which Is a 38 point (0.5%) increase in four weeks. To have profited from this trade we needed the price of the FTSE to stay within a 1000-point range (6700-7700).
You may consider buying back the strangle today for the cost of 14p crystalising a profit of 96p (£960 on 1 Lot), this is because, closing this trade allows us to free up margin to enter a new trade as well removing the remaining risk exposure until expiry of the options (three weeks).
Alternatively, you could hold this trade for another three weeks to attain the full profit potential of 110p (£1,100). However, for this to happen the FTSE would have to remain within our defined range for another three weeks and more importantly, the opportunity cost here is using that initial margin to enter another trade within this period which would yield a return greater than 14p.
Our growing client base have profited from this trade idea, if you would like to discuss how OptionsDesk can help you or if you would like to become a client, please get in contact.