Issue #195 - Strangle on XOP
Neutral on Oil Exploration...
Trades are for educational purposes and not a recommendation or financial advise.
Scorecard
STRANGLE ON IWM (UPDATE)
IWM has fallen 3.4% since entry. The overall trade is in losses now at around $97. Nothing much to worry, in fact going down is fine as the other leg on the short call side is profitable at $99, with remaining premium of $51. If the price drops further and remaining short call price drops to around $0.02-$0.05, we will close the short call leg. But the short put will have a bigger loss and we seek the price to hit some form of support at $204/$205 and bounce back above $208 (the short put strike). If it takes longer time to bounce, it is better for the trade as the decay will be bigger once it goes back OTM above $208. If our short call was closed then the bounce will even result in a faster turnaround of the trade from overall losses to overall profit.
We do not need to adjust the strikes for now and leave the price action to play out.
STRANGLE ON XOP
Over the past six months, XOP ETF has experienced significant volatility, with prices fluctuating between $151 and $124. The oil market has also seen a general decline in prices after first half of 2024 with a bigger rally in the last 2 months.
Given this context, the options strangle strategy is designed to capitalize on the expected continued volatility in XOP's stock price. Regardless if XOP goes down or up, we can profit as long as it stays within our selected upper and lower strike zone. We would normally do a strangle around 16 Delta both side for a high probability trade of above 70% probability of profit.
XOP is now trading at around $142. The resistance price, previous high is $150 and the support, previous low is $124.5.
Trade Entry (DTE 21 February)
Sell a Short Call at strike $156
Sell a Short Put at strike $130
Collect a premium of $205 with buying power blocked of $1600.
Adjust as necessary on market open.
By selling both a call and a put, you are positioned to profit from the premium collected, as long as the stock price remains between the strike prices of $156 and $130 by the expiration date.
This is a High Probability of Profit trade with a 74% probability of profit, this trade offers a favorable risk-reward ratio based on the blocked buying power of $1600. However, we need to take care of the bigger risk on the upside if it moves above the strike price of $156, as that side of the risk is unlimited. Nevertheless, as we are trading an ETF related to commodity (oil), it is less likely price will shoot up 50-100% in a short period of time.
Risk Management
Regularly monitor XOP's stock price and market conditions to adjust the trade if necessary. As the price of XOP has rallied for the past 3 weeks, it could continue to go up further but may hit resistance or overbought situation and retrace from there. This could be positive for the trade as the price comes back towards the entry price with time passing and options decay kicking in.
Consider exiting the trade early if the premium decay is 50% of the total premium collected.
That's it for today's trade breakdown! If you found this helpful, make sure to like, comment, and follow for more trading insights. Happy trading, everyone!
Trades are for educational purposes and not a recommendation or financial advise.
DISCLOSURES
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
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