Crevasse Investing and Derivatives - Two followups.

My recent blogs about a nice little derivative transaction and, more recently, my piece about Crevasse Investing have seen the chickens come home to roost  (or perhaps even the Black Swans) in a most apposite way.

The last few days have seen the Euro-crisis dominate the news despite the fact that the underlying numbers have been in the public domain for  months. Once again the shoal of fish have turned simultaneously. In addition the twin "saviours" of the US economy - Quantitative Easing and currency depreciation have turned from being the darlings of Wall Street to the very Devil incarnate in little over a week.

This morning we hear of the two Koreas at it once again and whoops the crevasse has been struck. Despite the idiotic ramblings of our Dear Leader (Kim rather than Milliband, although they have the same credibility in my mind) it is rather a case of nobody really knowing or possibly caring what goes on over there - possibly one of the few theatres of action where that is true in the modern world. The US will not and dare not take on China, unlike the 1950s, and similarly China has too much of a good (economic) thing going on to do more than help discomfort the US.

So we have our market crevasse and the gloom may well continue while in the real world things are looking rather brighter. The recent Hewlett Packard results bear closer scrutiny as the PC and related technology market have become a good leading indicator for economies over the last few years and while I would not want to be as crass as Lord Young, there is some truth in the  benefit low interest rates are currently having at the consumer level. The glacier grinds on - the crevasse will soon present a good investment entry point.

With regard to the derivative investment idea I wrote about a few weeks ago - to update the figures the situation is currently as follows -

Short FTSE @ 5675
Sell 1month (October)5675 Put Option @108
End of month price 5808
Open Loss on FTSE (5808-5675) = 134
Less Premium Received (-134+108) Net Open Loss -26 points (Equating to £260 in real money)

After first option expires
Still Short FTSE @ 5675
Sell another 1month (November) 5675 Put Option @ 64
End of month price 5730
Open loss on FTSE (5730-5675) = 55
Less first Premium Received and second Premium Received (-55+108+64) = Net Open Profit 117 points (£1170).    

After second option expires
Still Short FTSE @ 5675
Sell another 1month (December) 5675 Put Option @ 109
Current price 5645
Open profit on FTSE (5645-5675) = 30
Add to first Premium Received and second Premium Received and third Premium Received (+30+108+64+109) = Net Open Profit 281 points (after deducting the open FTSE profit as the option is an equal amount under water) (£2810). 

Of course the third option is still in play and to that extent I have simplified the calculations - but potentially a marvellous return on an investment of approximately £5000 over less than three months.

Again I must stress how important it is to understand the risks - but equally do not forget the potential rewards.

Dum Spiro Spero