[Options] Banking More Premium

Sean McLaughlin
August 31, 2022

With the rise in $VIX (the "fear gauge") over the past several trading days continuing to persist, we've been on the hunt for options premium selling opportunities. Higher volatility environments lend themselves to better opportunities for premium sellers who can manage their risks and size their positions conservatively.

As such, we're going to sell some premium in the banking sector to take advantage of elevated premiums and what appears to be a high likelihood of continuing sideways action.

Check out this chart of the Regional Banking ETF $KRE:

We think there's a good chance that the recent high near $69 per share and the recent lows around $57 per share will act as guide rails for further consolidation over the next several weeks.

With options premiums being what they are, this sets up a good opportunity to sell a delta-neutral spread to collect some income while regional banks sort themselves out.

Here's the Play:

I like selling a $KRE October 57/69 Short Strangle for an approximately $1.45 credit. This means we'll be naked short both the 57 puts and an equal amount of 69 calls. Brokerages will require about $700 of margin per 1-lot held. Our PnL graph will look like this:

Our risk management will be as follows: Any close outside our short strikes is our signal to exit the position. So if we see $KRE close below $57 or above $69 at any time during our hold, then we'll close the entire spread down and book the likely loss. In this situation, regardless of how we feel about the future prospects of $KRE, our thesis for being in this trade (sideways consolidation) will have been proven false by the market and is all the reason we need to exit.

In the meantime, we'll leave a resting order to close this spread down for a profit at 70 cents. This would represent a capture of 50% of the maximum possible profit available in this trade, without having to hold it all the way until October expiration. Take the cream off the top and move on. That's our best practice with short strangles.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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