[Options] Leaning on Strength to Hold
But upon further inspection when I dug into the options chain, the upside calls weren't offering much in terms of premium.
For context, check out this chart of $XLF:
The upper bounds for XLF are currently in the $42.00 per share area, while the lower bounds for the past 6+ months have been the $36 level.
When looking into the April monthly options chain, the 36 puts were offering reasonable premiums -- around 68 cents per contract. Meanwhile, the 42 calls were only offering 27 cents of premium.
I don't like such skinny premium on the upside.
When I brought this up to the team, JC said: "Why don't we just sell the puts first, and then leg into the calls on a pop to create a short strangle?"
At the time, I agreed. "Yes, I like it. If/When XLF makes a run up towards 41, then maybe then we look to sell a 42 call at a better premium to complete the strangle."
But I didn't immediately put the trade on as it seemed to me the market felt heavy this morning and I was thinking we might be able to sell the puts at better prices later on if I waited. Sure enough, that has materialized. Now we have a better chance at getting filled north of 70 cents on those short puts. Meanwhile, the way I see it now, if $XLF does make a run back at 41 -- by the time we're looking to sell calls, our short puts will likely have depreciated enough that we could cover them at a tidy profit. So it doesn't even make sense to sell the calls.
And that's where I'm at.
Here's the Play:
I'm selling $XLF April 36 puts for 72 cents per contract or better. This is a naked short position which means it entails higher risk. Our brokerage will require us to post at least $500 in margin per short contract we hold.
Because of the theortically unlimited risk in these short puts, we'll want to be vigilant with our risk management. First off, I'll trade this position smaller than I normally would. Secondly, I'll be militant about exiting this position if the range is busted on the downside.
The level I'm watching is January 24th's intraday low around $37 per share. If we see any close below that level, that will be my signal to exit the trade (win or lose) on the next trading day. Depending on when that trigger happens, there's a small possibility that we'll still be able to escape with a small win if theta has worked enough magic to erode significant premium in these out-of-the-money puts by then.
Meanwhile, I'll leave a resting order to cover these short puts for half of the premium I collect at trade initiation -- at around 36 cents per contract. Not being greedy, just being tactical for an opportunity at a high probability win.
If you have any questions on this trade, please send them here.
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