May FTSE Options. Part 2

It may be only a "bear rally", but with the FTSE up 58 points by 9.00 a.m., I redeemed my 5 "short" contracts in May 4400 Calls and recouped the cost by selling "short" 5 contracts in the May 4500 Calls and 5 May 3950 Puts. This leaves me in the middle of a 550 point spread with 10 trading days to expiry on 15th. May. Net receipts for May contracts now £849. Watch this space.

Bought . . .

. . . a tranche of Taylor Wimpey shares yesterday. New houses will get built in the fullness of time, I guess.  And the banks and B.Socs will use money they've nicked from us taxpayers to lend to other taxpayers who can't afford the repayments and the game will start again.  But it will be different next time, won't it, because the Men in Red Braces will tell us so . . . don't forget, folks, there can't be bust without boom or even vice-versa . . .

And here's an interesting thought.   Mr Brown wants to resolve the question of M.P.s' expenses by paying them a per diem rate JUST FOR TURNING UP AT THEIR PLACE OF WORK. This daily hand-out of taxpayers money is to be more than most of us taxpayers get for doing our day's work!!!  And 650 snouts-in-the-trough Members wonder why we don't respect them any more . . . . even though they are very very important and clever people that this bankrupted country cannot possibly do without.

Centrica plc . . .

. . went ex-dividend this a.m. The share price dropped by (more or less) the value of the dividend. Refer to my posting of 16th. March. The share price remains below the strike price of my "short" September 260 Calls options on the stock. So I was not assigned for the dividend. I keep the stock and will be paid the dividend in due course. What happens next? If the stock price climbs above 260p before the options expire in September, I could be assigned at any time and will certainly be assigned on expiry day - i.e. I must sell the stock to the counterparty at 260p per share regardless of the market price. If the stock price remains below 260p through to the September expiry, I will keep the shares, pocket the loot paid to me when I sold the Call options and look to selling a further round of Call options for December (or March 2010) expiry, at a strike price to be determined by the current price of the Centrica shares. Look at it another way. Every time I sell Call options on the stock without subsequently being assigned I effectively reduce the price I paid for the stock when I bought it . . .

The Alphabet Recession . .

. . . featured on Radio 4 Business News this a.m. (22/04/09) Three experts held forth. No.1 thought the recession would be "V" shaped. Sharp drop, sharp rise towards end of this year. No.2 disagreed. It will be "W" shaped. Drop, bullish blip for a bit, down again then up,up and away! No.3, the ultra-pessimist argued for an "L" shape. Down into recession so deep that government borrowing would exceed GDP and eventually the interest payments on that borrowing would exceed GDP, and we'll all be murdered in our financial beds! I think we can average the vapourings of these 3 redbracers and conclude that the economy is probably well and truly pear shaped.

Unloaded . . .

. . . my tiny holding of W.S.Atkins plc yesterday, adding about £240 to the Save-The-Richard fund.

Every little helps, or as most under-40 year olds say these days, "Ev'ry li'ul 'elps" And I'm not excluding radio and t.v. announcers . . .

May FTSE Options

I guess my "short" FTSE 4350 April Calls (5 contracts) will expire worthless (i.e. in my favour) tomorrow morning, 17th. April, and I will trouser the £806 I got when I sold them.   So today I opened "short" on 5 contracts in the FTSE 4400 May Calls, at £160 per contract, £756 net of expenses.  These contracts expire on 15th. May.

Market movements are as unpredictable as usual.  One expert on BBC Business News this a.m. was talking the market down to 2750 or maybe it was 2350. Others can see the green shoots of recovery. The City rings to the twanging of red braces. The Masters of the Universe are straining at the leash. The next bull market is just over the next hill and I can predict where the FTSE Index of 100 leading shares will  close on any business day you care to name in the next 10 years . . . .

My Friendly Neighbourhood stockbroker asks . . .

. . . "Why is it that nearly everybody is obsessed with money, but hardly anyone is interested in it?"

April First, so watch out . . .

One commonly hears experts, i.e. men in red braces, say "The market always looks two years ahead" If this is true, why did not the equities market fall to its present level in the autumn of 2006, two years before the credit crunch hit stock prices . . .

. . . and remember as you peruse the money/investment sections of the Fat Sundays, the expert's most useful weasel-word is "could" - as in "The price of BoilerRoon plc could double in the next twelve months . . . " They always miss out the next bit which (roughly) states " . . or you could lose your shirt, pension pot and des.res."

Google . .

. . . "Dow Jones Index 36000" and/or "James K. Glassman" and NEVER forget - when formulating your investment policy . . . LEAVE IT TO THE EXPERTS!!

A quote from , , ,

. . . the preface to Moorad Choudhry's book "Bonds: A Concise Guide for Investors" (Palgrave Macmillan 2006). "The bond market is a proper market. Not like equities . . . " (Attributed to Sean Baguely, Managing Director of Fixed Interest, Hoare Govette Securities Ltd., 1992). Does this mean that the market in equities derivatives is even less real? Now look up "The Black-Scholes Equation" - sometimes referred to as "The Black Hole Equation" - on Wilkepedia. It relates to pricing derivatives. Ne'er mind the degree level maths. Are the assumptions realistic? Can you buy a fraction of a share, or a single share, without incurring charges . . etc . . etc.

Friday 20th, March

My "short" March FTSE Index 4500 Call contracts expired in my favour at 10.30 today with the index at 3790.   Profit £656.  My UK 4% Sept. 2016 Gilts are up about 9% since I bought them in October 2008.  I am holding a (very) modest paper profit on a (very) few W.S. Atkins shares, and on the principle that it never rains but it pours . . . .  I won £50 in the March Premium Bond prize draw!!

April FTSE Options

I am assuming that my holding of 5 "short" March 4500 Calls on the FTSE Index will expire worthless at 10.30 a.m. on Friday 20th. March 2009. FTSE presently - i.e 15 minutes ago, see below - at 3855. So I have sold-to-open 5 April 4350 Calls at £170 per contract, or £806.00p net of expenses. These expire on 17th. April.

(UK equity and Index options expire at 10.30a.m, third Friday in the month)

All live options can be traded at any time the markets are open. Equity options can be assigned at any time. FTSE options are (almost) all "european" style assignment, and can only be assigned at the time of expiry.

Sir Fred Badwin

. . was knighted for his services to banking in 2004. No power on earth will shame this shameless character into giving up a penny of his pension pot. He has said so himself. So why not strip him of his knighthood (for his disservices to banking). That might give him pause for thought. He should remember as he salts his loot away that his management of RBS and his unquantifiable greed, has helped to bring the U.K's reputation for sound banking into disrepute. Aren't I glad I've always been with another bank/building society, which for privacy reasons I will not name, but which enjoys a nationwide reputation for integrity etc.etc . . .

My stock option position(s)

Only 1.   Five (5) "short" Calls in the September 2009 series in  Centrica plc struck at 260p.  These calls are covered by 5000 shares bought last week at 240p.  If assigned on these Calls I make £1000.00p less the buy/sell commissions.  The contracts expire on 18th. September 2009.  There is an ex-dividend date in  April.  I took in £756.00p net of  expenses when I opened the contracts.  What are the possible outcomes?

1.  The Centrica shares - presently 246.5p mid price - stay below 260p on ex-dividend day and through to the contract expiry date.  In this case, I keep the £756, pocket the dividend, and keep the shares.  The downside is that the stock may fall below 240p and I am nursing a paper loss. In which case I sell further Call options in (say) the March 2010 series  and so recover (some of) the paper loss.

2.   The shares climb above 260p by ex-dividend day.  In this case I might be assigned by the counterparty who will buy the shares from me for 260p regardless of the market price, and he/she will collect the dividend.  I have then made £1000.00p less buy/sell commissions on the shares, and I trouser also the £760.00p I got for the Call contracts - which die whenever the counterparty assigns me.  Or -

3.   The shares are below 260p on ex-dividend day but climb above 260p by expiry of the contracts. I must sell the shares to the counterparty on his/her assignment for the agreed 260p. My take is then as 2) above, plus the dividend payment.

Note that the two parties to an option contract are mutually anonymous.  Neither knows who the other is.

 

My March FTSE position(s)

Only 1.   Five (5) contracts opened "short" in the March 2009 4500 Call series, on 20th.February 2009, i.e at expiry of the February 2009 FTSE contracts.  When these 5 contracts were opened, the FTSE Index of 100 shares stood at about 3900.  Receipt for the opening sale of these 5 contracts was £656.00p   The liquidation cost of these contracts at the present time is NIL. March contracts expire on Friday 20th March at 10.30 a.m.   Unrealised profit this month - £656.00p

Speak to you on Friday 20th. - unless this position goes pear-shaped before that.

FTSE 100 since Day One

The left (vertical) axis shows closing values of the FTSE index - running 5 point average, plotted every 10 days. Horizontal (dates) axis is purposefully not shown. Google to find when the FTSE 100 Index first appeared, then interpolate along the horizontal axis to fix approximate dates. What do you learn from this graph? The straight line of little squares shows the trend line from Day One. Basis of calculation for this trend line is "White below the trend line has same total area as green above the line"

The Financial Times Index of 100 leading shares on the London Stock Exchange . . .

. . . opened at 8.00 a.m (GMT) sharply higher and hit 3815 very quickly - up about 60 points. Bloggers in NY or Hong Kong or Tokyo, where the local index is displayed in real time in shop windows, may be amazed to learn that here in the good old U.K we can't access the Index in real time without parting with an arm and a leg. A few years ago our BBC displayed the index in real time - until the FT or the Stock Exchange or somebody - demanded that they pay £100,000 a year for the privilege. So our free information is always 15 minutes out of date. I make do with 15 minutes out of date information gleaned from Teletext or Ceefax or the Business pages of the BBC website for the Index, and the LIFFE Euronext pages for (15 minutes out of date) option prices - free, but registration required. Fear not folks, the delay rarely matters except to the experts in red braces who want to take 10 cent turns on $100,000,000 trades. What's "FTSE"? What's "EURONEXT"? What are "OPTION PRICES"? Back soon. (If you need to ask What's the BBC? or What's TELETEXT? - forget about option trading. Stick to basket-weaving)

A RANT from the Doc's HobbyHorse!

When I tell people that I "Trade options on the FTSE Index of 100 shares", they often say something equivalent to "WHAT?"

When I explain what "trading options on the FTSE Index of 100 shares" involves (basically vigilance and an iron determination to take NO NOTICE AT ALL of experts), they usually say something equivalent to "Half to one- and -a -half percent a month, compounding! Why doesn't everybody do it?"

At this point I ask them two questions.

Q.1 "Before we had this conversation, had you ever heard of 'option trading' "?

A.1 "No" or "Well, vaguely." or similar.

Q.2 "So now I've outlined the rudiments, would you consider opening a trading account with a stockbroker who deals in options, and having a go yourself?"

At this point, my interlocutor usually recoils in horror and says something like "I wouldn't know where to start." or "I'd be terrified!"

So now, dear blogreader, you know why so very few people (try to) improve their bank balances by trading options in the FT Index of 100 leading shares on the London Stock Exchange or by buying shares or learning the basics of bond trading, or by learning anything of any significance at all about MONEY , what it is, how it works . . etc . . . etc . . don't get me started . . . . !

A little story told to me by a friendly neighbourhood stockbroker.

"Doctor FTSE - I've spent my working life in the finance industry. And here's one of my general conclusions. Nearly everyone is obsessed with money. But very, very few people are interested in it." See the difference, blogreader?

And another story from a friend who is a member of an Investment Club -

"People join golf clubs because they like playing golf. They join the local amateur operatic society because they like singing "The Mikado". They join Investment Clubs so that other people can make money for them while they drink beer."

Now you know the main reasons why folk leave their pension funds in the wrong hands. i.e in the hands of someone OTHER THAN THEMSELVES. They think they can't do it because they don't understand money, or money is too scary, or they would rather sing "Three Little Maids" or play golf, or waste time writing blogs or drinking beer.

If you can read, dear blogreader, there are three professions whose help you do not need.

1.Financial Adviser 2.Fund Manager 3.Estate Agent. These guys and gals exist because you can't be bothered to do for yourselves what they try to do for you. You think they can read the future better than you can read it for yourself. They can't. And they don't 'arf charge you whack for trying to do it! Think Lehman Bros. Think Equitable Life. Think Northern Rock. Think the Dot.com bubble . . .

The world works as follows for all too many people. "Don't ask me to learn anything about money. I haven't got enough of it but I'm too busy writing my Christmas card list, planning my next holiday, organising my daughter's wedding, watching ManUnited, watching "The X Factor", eMailing, Facebooking, YouTubeing, getting drunk . . . "