[Options] The Everything Burger

Sean McLaughlin
February 1, 2023

[9/7: updated stop to 56]

As promised during yesterday's The FLOW show, I'm following up on a possible trade idea we discussed.

However, after Strazza and I put our heads together with the rest of the Analyst team this morning, we're going to attack an opportunity in Schlumberger $SLB from a different angle -- one that can be rewarding regardless of which direction the stock takes.

Here's the chart:

What this picture doesn't tell us is that our feeling here is $SLB is at an inflection point. We feel it's either on the verge of ripping higher, or the run exhausts its remaining fuel here and gives a bit back.

Conveniently, it seems the options market has fallen into a bit of complacency here, as implied volatility (the affordability of options) has dropped to new yearly lows:

This offers us a unique opportunity to position for a "surprise" move in either direction -- up or down! We'll accomplish this via a long options straddle position.

Here's the Play:

I like buying a $SLB January (2024) 55 Straddle for an approximately $16.00 net debit. This means we'll be long both the 55 calls and the 55 puts. And as you can see from this PnL graph, if $SLB sees a large move in either direction, we can potentially profit:

Additionally, if implied volatility were to rise (for whatever reason), that will goose the value of our long options in our favor. Certainly, the current IV can decrease from here. But considering we're at the lowest levels in over a year, it's more likely that vol will mean revert in our favor at some point over the next 12 months.

Our potential profits are theoretically uncapped in this trade. However, we're going to approach this straddle from a more tactical mindset. We're not looking for a home run. Instead, we're looking to improve our odds of success.

We're going to leave a resting order to close this entire spread down for a profit at a $20.00 credit. If we're able to sell this spread for $20, this would be a 25% return on our invested capital. I like our odds of this happening.

However, if $SLB goes sideways on us, we'll plug the leaky valve and close the trade if/when the spread losses half of its value. So, if the spread finds itself trading below $8.00, that will be our signal to exit.

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 reviewed 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.

 

Filed Under