Options talk 1: technical
analysis and the Vix
Chapters 17 through 19 are more informal than those previously; their
purpose is to provide a general insight. As stated in the introduction to
this book, it may be impossible to coach you via long distance, but the
more knowledge you have, the more resources you’ll have. What follows is
not gospel, but it is based on a good deal of experience.
Analysis of a trade
In previous chapters we have referred to the use of technical analysis when
trading options. Here, we have an example of one trade. This was a real
trade, with a lot of real money behind it. I made this trade recommenda-
tion with the help of our brokers, and it was traded by one of our clients.
At one point, it came close to losing, but in the end it went really right.
Because it was a good trade.
End of Sep 06
Dec Schatz at 104.12
Schatz 104.00 – 103.90 – 103.80 put ladder
Pay 1 tick (0.01)
Maximum profit: (104 – 103.90) – 0.01 = 0.09 (9 ticks)
Upper break-even level: 104 – 0.01 = 103.99
Lower break-even level: 103.80 – 0.09 = 103.71
Technical support at 103.80
184 Part 3
Thinking about options
Our client was cash-flow trader at one of the London majors. She was
thinking that the Schatz had made a short-term low. We agreed. The
market had bounced off the technical lows at 103.80, but we thought that
the lows would hold unless the European Central Bank did something
funny, like raise interest rates. Our view of the economic reports told us
that they wouldn’t.
I analysed this trade forward, back, and upside down. I estimated that the
Greeks and the technicals made this a good trade. Being an ex-risk man-
ager, I preferred to sell the naked 103.70 put instead of the 103.80 put, but
that would have increased the cost of the spread to 4 ticks.
Anyway, I agreed to sell the 103.80s if we all agreed on a covering plan,
which was to buy the 103.70s if the market broke support at 103.80. We
would then turn the put ladder into a condor and cut our risk. All agreed.
Several weeks later the market retraced to the 103.80 area. This was a dif-
ficult ride for the trader because the 103.80s were in play. Still, we gave her
the confidence to know that her break-even level lay at 103.71, and that
we had a plan to cover.
We figured that we were seeing a two-test support scenario, which is
common in the technicals. We were concerned that if the market tested
the low once again, then it would break through.
The trader had a profit, so we advised her to close the trade, which she did
for 8.5 ticks. So we paid 1 for the spread and sold it at 8.5. Not a bad rate
of return.
Although we came close to being forced to cover,
we were never in danger of taking a big hit. But
if you want to know what can go seriously wrong
with this trade, then refer to the story on page 98.
Schatz put ladder
End Sep 06 Dec Schatz 104.12
Dec 104.00 – 103.90 – 103.80 put ladder pay 1 tick
risk below 103.71
but we see support at 103.80
End Oct 06 Dec Schatz at 103.80 sell at 8.5
Although we came close
to being forced to cover,
we were never in danger
of taking a big hit

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