[Options Premium] Hug That Line
We're going to strangle it. We're going to let these somewhat elevated premiums pay us.
My gut feel is that we're in for some sideways chop for the next month headed into our next earnings season. We've already had a nice little pullback in equities prices -- enough to get the blood pressure up for both bulls and bears alike.
Using a short strangle, this will give us maximum flexibility to make any needed adjustments along the way should the buy-every-dip crowd step in hard and face-rip us higher, or if the fear mongers are right and darker days are upon us.
Here's the Play:
We're going to sell a July $SPY Strangle at strikes and premium to be determined soon after today's open.
Now, dear readers are probably wondering -- but what strikes? What premium? All good questions.
We're going to wait and see where $SPY opens this morning. The goal is to sell the put that most closely corresponds to a -25 delta and sell the call that most closely corresponds to a +25 delta -- making us delta neutral at trade initiation. Likely, we'll be looking at around the 262 puts and the 285 calls, give or take a point. And we should be able to get around $5.00 for whatever spread we get off. When we get the actual trade on, I'll update this blog post at the bottom with our fill prices and strikes.
Regardless of the strikes selected, our risk profile will look like this on a 1-lot position:
Our goal in this trade will be to close it down when we can buy it back for 75% of what we collected at initiation. So, lets say we collect $5.00 today, we'll close to buy-to-close this trade at $3.75 or cheaper. We won't be greedy in a position with theoretically unlimited risk.
If at any time $SPY trades beyond either of our short strikes, then we'll play defense with the winning side by rolling it towards current price action for additional credit, still targeting a profit equal to 25% of the original premium collected. Let me give you a plain-english example:
If $SPY trades to 261.50 (below our 262 put), then we'll look to close our winning short call and then re-establish another short call at whatever strike now offers a +25 delta. The two trades (which could be executed as one trade by selling a call vertical spread) will result in a net credit which in effect lowers a break-even level on this position (protecting ourselves from further downside).
$260 will be our "abandon" level. Below that and $SPY might get real nasty real quick. We'll just completely close the trade down then. Conversely, I won't be interested in sticking with this trade if we break higher above 290.
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9:45am ET UPDATE: we got filled on a 264/285 Strangle for a $5.05 credit.