[Options] Sliding Sideways For The Rest of Summer?

Sean McLaughlin
August 16, 2023

As is common when the stock market is moving lower, we're seeing rising options premiums. We aren't seeing any big volatility spikes yet, and $VIX is still relatively muted, but the recent rise coupled with setups that appear to be ripe for some sideways action in the coming weeks and months has me on the hunt for delta-neutral premium selling opportunities.

Today's trade is in a metals and materials stock that appears to be stuck in a year-long range that we're betting on continuing.

Check out this chart of Freeport McMoran $FCX for a visual of what we're seeing:

 

While the range hasn't been small for 2023, it is a clearly defined range nonetheless, and the options market is offering us attractive premiums to sell strikes near the outside of this range. So let's get after it!

Here's the Play:

I like selling a $FCX October 35/45 Short Strangle for an approximately $1.80 credit. This means I'll be naked short equal amounts of both the 35 puts and the 45 calls:

Our thesis is that $FCX will remain rangebound for the rest of summer (end of September) which should give us plenty of opportunity to profit from this setup.

This position involves UNdefined risk; therefore, we need to be vigilant in our risk management. Any $FCX closing price north of $44.75 or south of $36 per share busts our range and invalidates our thesis. If/when that happens, I'll look to exit the trade.

In the meantime, as is my best practice with short strangles, I'll leave a resting good-til-canceled (GTC) limit order to close this spread for a .90 cents debit. I like to close these types of trades down when I can capture 50% of the original premiums collected. I don't like to be greedy with short premium trades. I'd rather take the 'cream off the top' of the elevated premiums, and walk away with a nice, early profit instead of sticking around and sweating those last nickels and dimes.

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

If you missed this week’s video Jam Session, you can catch it here.

~ @OptionsSean

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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