[Options] Stapled to These Levels

Sean McLaughlin
November 3, 2022

Well, that was fun!

Yesterday we were treated to the latest interest rate hike from the Federal Reserve and a speech and Q&A with Fed Chairman Powell that apparently wasn't well received by the market as stocks slid furiously into the closing bell and continued the selloff into this morning.

Where we go from here is anyone's guess. Still, I'd like to take the opportunity to continue taking advantage of consistently elevated options premiums and put on a delta-neutral credit spread in an area of the market where I think some sideways rangebound action may be setting up into the end of the year.

Check out this chart of the Consumer Staples ETF $XLP:

While the index has rallied impressively off early October's lows, it appears to be running into some overhead resistance at its 200-day moving average. We think this will slow the rise, at least for a little while.

December options are offering us a nice bit of premium to sell the 67 puts and 75 calls which feel comfortably far enough away given the current situation as we see it. So we're going to sell a Strangle in an attempt to dart in and out for some quick profits.

Here's the Play:

I like selling an $XLP 67/75 Short Strangle for approximately $1.10 net credit. This means I'll be naked short the 67 puts and an equal amount of the 75 calls for a net credit:

Since this is an undefined risk position, we'll size it conservatively and manage our risk levels closely.

Any $XLP closing price below $67 or above $75 is our signal that we're wrong and its time to exit the trade for a likely loss. Our thesis is on rangebound action. If XLP is trading outside this range, then we're wrong. Risk management is our #1 priority in this situation.

Meanwhile, I'll leave a resting order to close this spread down for a profit at a 55 cents debit. This will represent a capture of half of the total premium collected today, without remaining exposed to additional risk all the way until December expiration. My Best Practice in these types of trades is to always take half and not be greedy.

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

ASO subscribers who missed this 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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