[Options] Materially Sideways?

Sean McLaughlin
March 8, 2023

Today's trade is going to leverage the rising volatilities introduced into the stock market this week thanks to testimony from the Federal Reserve Chairman (I've been told).

When markets get dicey and volatility rises, I like to look at my universe of Sector ETFs and choose one that is both displaying higher relative options prices than its peers and looks set up for rangebound trading action over the next 3-5 weeks.

An ETF near the top of my list is the Materials sector ETF $XLB. We're going to bet on the recent sloppy trading action to continue sideways for a bit, and we're going to sell a delta-neutral spread to collect premium and position ourselves to earn the decay.

Here's the chart:

The highlighted levels represent pretty strong near-term support and resistance and the strikes of the options corresponding to those levels in April options offer us attractive premiums to sell.

Here's the Play:

I like selling an $XLB April 77/87 Short Strangle for a $1.25 credit or better. This means I'll be naked short both the 77 puts and an equal amount of 87 calls, and this net credit I receive today is the most I can earn if XLB closes in between 77 and 87 on expiration day:

Of course, I have no intention of holding this spread until Expiration day. I'll look to take profits when I can close it down for half of what I collected today. This means I'll be leaving a resting GTC limit order to close this spread for .60 cents. This would represent a capture of 50% of the maximum possible profit, without holding the risk for too long.

While my limit order to close is working, I'll be monitoring the price action in $XLB. If at any time during our hold XLB closes below $77 or above $87 (my short strikes), then that is the clear signal I'm looking for that I'm wrong and I'll want to close the spread done near the opening of the next trading day. A close outside those prices is proof that my thesis for rangebound trading action in XLB is wrong.

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.

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