[Options] Going For a Margin of Safety in Tech

Sean McLaughlin
October 4, 2023

There's a time to be aggressive and go for big gains, and there's a time to shoot for higher probabilities with smaller payout potentials.

I'm finding it hard to muster any conviction to go either long or short right now, as I can make compelling cases for both the bull and the bear thesis here.

In today's tape, my feeling is we need to err on the side of being too conservative and trade with a margin of safety.

So today, we're putting on what I feel to be a conservative, delta-neutral options trade in the technology sector ETF $XLK.

As you can see from this chart, XLK is stuck in the middle of the range it has formed since breaking out this summer:

Options premiums are elevated across the board as $VIX has flirted with 20 over the past couple of trading days. And the premiums in $XLK are allowing us to go comfortably far away (especially on the downside).

Here's the Play:

I like selling an $XLK November 150/175 Short Strangle for approximately $2.50 net credit. This means I'll be naked short equal amounts of the 150 puts and the 175 calls:

Our risk management here is simple: Any $XLK closing price below 150 or above 175 is our signal to exit this spread, no questions asked. This would be a irrefutable signal that the something has changed in this market and we won't be interested in sticking around to find out if the breakout is sustainable. Risk management will be job #1 at this junction.

In the meantime, if this range holds, we should have no trouble buying this spread back for a $1.25 debit to book a profit. We'll leave a resting GTC (good 'til canceled) limit to accomplish this.

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

If you missed last week’s video Jam Session, you can catch a replay on Stock Market TV.

~ @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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