Daily options
Another way to use Daily options is similar to what we detailed with regards to Binary options last month. In fact, at the time of writing this piece, Daily options would have been an ideal way to deal with this past week as we have just experienced a sustained shake down in the markets with the FTSE 100 toeing the 5500 level. How you could use a Daily option if you are looking to catch a bounce intra-day, and not extend yourself over an evening for example, is to buy half of your position size that you would ultimately like to wind up with as a standard long spread bet. Then, if the FTSE falls further (as it invariably always does when trying to average into a downtrend!) you would add the other half of the position equivalent per point by way of a daily option bet. Let’s take an example that I personally traded this last week below: As the FTSE fell to 5530 I began to build a £20 per point position. The FTSE then fell to 5480 and the time was 1:30pm. I felt that the US markets were ripe for a rebound that afternoon, but did not want to extend the ‘natural’ long spread bet position in case I was wrong. The 5500 Daily calls were trading at 11 and so, for a cost of £220, I was able to purchase another £20 equivalent position size.
Now, if the market had continued to fall I would still be losing on the £20 outright long bet position and of course on the fixed premium paid for the option position, but I had the flexibility to close the outright long bet on a further fall and so capping my losses whilst still being able to benefit from any rise before the close above the 5511 level (5500 being the strike price and 11 being the premium cost) as I was still exposed to the 5500 Daily calls. As it happened, the FTSE did rally back up to 5540 that day and a useful profit was booked on both the long bet and the option — the latter with minimal incremental risk. The key with FTSE Daily options that are opened as outright speculative plays (i.e. non hedging) is to only bet a small percentage of your equity pot. When you are speculating on an outcome over such a short time-scale then it is imperative that your trade size is scaled back. This doesn’t mean that you will not make as much as usual, however, as the very nature of options is that they are a ‘geared’ investment, i.e. your returns to the upside are outsized. I call this measured leverage.
June 2012 | www.financial-spread-betting.com | 59