Daily options
The beauty of the daily option is that you can sell a Daily Put option against your short FTSE position. For example, depending on the time of day that you look to sell the option (the longer the amount of time there is left in the day the higher the value of the option due to the larger ‘time’ value element), a 5400 Put might be selling at 30. By selling the same amount (or less) of the Put as your underlying short bet what you have done is capture an additional 30 pts of premium. Now, should the FTSE rise back up to say 5500 that day, you have taken in an additional 30 pts and so increased effectively your short level to 5630 (5600 + 30) — you have therefore mitigated the up move.
This strategy works particularly well on the short side when there is a sharp drop as opposed to a long and drawn out market fall, as the sharp and large fall invariably has the effect of increasing ‘volatility’ — an important component of an options price and so allowing you to sell premium at a higher value. When the FTSE falls by 150-200 points in a day or overnight, in many cases, you can get sharp temporary rallies off this magnitude of fall, and so the daily short put ‘at the money’ sale when the market is down by this scale is a useful strategy that can be employed to allow you to remain in a more medium term position.
If the FTSE continued to fall that day, then any level below 5370 would result in your losses on the Put being exactly matched (if you had sold the same amount as the short bet) by the profit on the short side. In effect, for that day, you have locked your exit level on the overall position at 5370. Of course, should the FTSE continue to fall after the days bet had expired, then you would continue to gain on the underlying short bet as the option would no longer be in existence.
Here is a Profit & Loss diagram showing the sale of a Put premium against a short position:
Note — in our opinion, you should always sell ‘at the money’ options as the time value (which is what you are really selling) is the highest here. Also, if the premium is less than 20, I personally don’t think it is worthwhile selling the option — you may as well just exit half your position to hedge yourself.
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June 2012 | www.financial-spread-betting.com | 61