Issue #199 - Strangle on XBI
Strangle on XBI...
Trades are for educational purposes and not a recommendation or financial advise.
Market Scorecard
All green last week. Coming back to ATH after the tariff fears. Gold is going ballistic with crossing 10% in just less than 2 months in…
Trade Scorecard
IBIT Call Ratio (Update)
IBIT price sold off after entry but started to recover. Now trading at $55.38. BTC/USD also went down post entry and now trades at $98,184, 0.9% down. Our target is for BTC/USD to move back up to the resistance level of $104,000. The trade is now at a loss but once it cross back above $57 the trade should be good again.
Trades are for educational purposes and not a recommendation or financial advise.
STRANGLE ON XBI
SPDR S&P Biotech ETF (XBI) is an exchange-traded fund that aims to track the performance of the S&P Biotechnology Select Industry Index.
XBI has been a steady income generator for us and we thought it is also a good time to share how we trade it using options credit strategies. We normally run strangles on XBI monthly expiry. Buying power normally runs around $1k/contract with ROI of 15 to 20% for duration of 40 to 45 days. Below is on one of our accounts and the win rate on XBI strangles is perfect so far.
A short strangle is an option strategy where we sell an out of money call and sell an out of money put and we normally choose to sell it at Delta 16 each side to create a more than 70% probability of win trade. We need the stock price to stay within the short call strike and short put strike at expiry to be profitable. Risk is unlimited on the upper side while limited to the strike price on the lower side. Due to this, we tend to use this strategy on ETFs as it comprise a pool of stocks and big outlier movements to one side for extended period would be less likely, probable still but less likely.
Below, you will see the expected move for XBI till 21 March, to be within upper price of $95.74 and lower price of $84.94. XBI is now trading at $90.34. IV Rank is around 29 which is good for short options strategy.
Trade Entry (DTE 21 March)
XBI is now trading at $90.34. Price action now is on a wave down since November 2024 highs of $105.47. Trade risk is towards the downside. On the upper side, there should be a resistance at previous November high.
The trade involves
Selling a call at strike $99
Selling a out at strike $83
(Adjust the strikes on market open, just select strikes around 16 delta each side)
The selected strikes are above the expected move of $95.74 on the call side and below the expected move of $84.94 on the put side. The credit collected is $141 per contract with blocked buying power of $1073 which gives a ROI if around 14%. Probability of profit is around 74% with 50% probability of profit at 85%, if we close the trade at 50% of the max profit.
Trade Management
Normally, there is not much things to manage unless the stock price moves in a single direction towards any direction of the upper or lower strikes. As we are now having a buffer of around 8-9% of the current stock price till 21 March, we only need to manage it if this buffer is being breached.
As we are now in the middle of the strike range, we should be in a good position. XBI can potentially move down 8% within the next 38 days but such a big move down in a short time space, would probably result in an oversold situation and stock price could bounce back up. And by that time, we could possibly be close to the end of the expiry and the trade could be back in profits.
If somehow the strikes get breached and goes in the money, we could roll the strikes in time to a longer expiry to buy time for it to move back out of money. Normally, we could roll at a premium as long as it does not get deep in the money. We can do weekly rolling if it gets slightly in the money and let the trade expire once it gets back within range.
For a stock below $100, rolling up or down the tested side, would result in little premium or protection, so we would not normally manage this way. But, we may close the side if premiums left is less than $0.05, so that when the price of the tested side gets back out of money, the trade could move back to profitability more quickly.
That’s all the gold nugget this week and catch up at our next sharing. Remember to share and like and follow us for more.
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
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.