[Options] Building Premium Homes
Here's a chart of the Homebuilders ETF $XHB:
As you can see, we've got some pretty significant levels to lean against. $73 is the level $XHB climbed to early this year. It was resoundingly rejected. And the $60 level acted as significant support in the last couple of months of 2022.
I'm making the bet that these levels will continue to hold $XHB in check, at least for the next few weeks, which is all we need to make money with a short premium trade.
Here's the Play:
I like selling an $XHB April 60/73 strangle for an approximately $1.85 credit. This means I'll be naked short equal amounts of the 60 puts and the 73 calls. This net credit is the most I can win, though I'll look to take profits early.
I'll leave a resting good-til-canceled (GTC) limit order to buy back this short spread for a .90 cents debit. If I get filled there, then I will have successfully kept half of the initial premium collected today, without having to hold the risk all the way until April expiration.
In the meantime, since I have theoretically unlimited risk due to the naked options, I'll be diligent in exiting this position if we see XHB close outside of my strikes at any time during my hold. So any XHB close below $60 per share or above $73 per share is my signal to take risk off the table and pay whatever it costs to close the spread down. If XHB is outside of my strikes, then my thesis of rangebound trading action is busted, and I won't be interested in sticking around to see what happens next.
ALTERNATE TRADE: If naked options make me uncomfortable or the margin requirement for this trade is too onerous for my account, I could always add some cheap out-of-the-money long calls and puts to bring down the margin requirement and define my risks. This reduces the net credit I'll receive for putting the trade on, but I'll simply set my GTC limit order to close at half of whatever net credit I receive today. This effectively turns this spread from a Strangle into an Iron Condor. But the risk management rules for this trade will remain the same -- we'll exit on any breach of the 60 or 73 short strikes.
If you have any questions on this trade, please send them here.
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