OPENING: XOP JUNE 21ST 32 SHORT STRADDLE
Updated
This is a continuation of a directionally neutral premium selling play (See Post Below) which I've rolled out to June and transformed into a bullish assumption premium selling play.
Here, I'm looking to work it as a quasi-synthetic covered call, with the in the money short put standing in for my stock, and the short call acting as cover. Naturally, it isn't completely accurate to describe it as a "synthetic covered call" because covered calls have no upside risk, and this setup does. A more accurate description would probably be "bullish assumption short straddle."
A true synthetic covered call would be something like a 70 delta short put with no upside risk since many covered calls are in the area of 70-80 net delta long (100 long delta for the stock, 20-30 delta short for the call).
There are a couple of reasons for why I prefer bullish assumption short straddles to in-the-money short puts with covered call metrics: (a) the delta is a little flatter; and (b) you get a little extra sumthin' sumthin' in cost basis reduction by having the short call on. Here, the net delta of the position is around 50,* versus the 70 delta short put/synthetic covered call. As usual, the trade off is the upside risk aspect of the setup, which will have to be managed as any other oppositional setup would in the event that the underlying rips through the short call strike.
In any event, I've collected 2.86 in credits so far, which would mean my cost basis in any shares assigned via the 32 short put would have a cost basis of 29.14 versus 28.98 spot, so it's slightly underwater at the moment.
Like a covered call, I'll look to roll the setup out as a unit when the short call approaches 50% max.
* -- The net delta on the position can be made "shorter" by setting it up closer to at-the-money; "longer" by setting it up farther away. Generally speaking, I like to sell the 25 delta short call and sell the same strike short put, which generally yields delta metrics in the 40-50 net long area, depending on skew.
Here, I'm looking to work it as a quasi-synthetic covered call, with the in the money short put standing in for my stock, and the short call acting as cover. Naturally, it isn't completely accurate to describe it as a "synthetic covered call" because covered calls have no upside risk, and this setup does. A more accurate description would probably be "bullish assumption short straddle."
A true synthetic covered call would be something like a 70 delta short put with no upside risk since many covered calls are in the area of 70-80 net delta long (100 long delta for the stock, 20-30 delta short for the call).
There are a couple of reasons for why I prefer bullish assumption short straddles to in-the-money short puts with covered call metrics: (a) the delta is a little flatter; and (b) you get a little extra sumthin' sumthin' in cost basis reduction by having the short call on. Here, the net delta of the position is around 50,* versus the 70 delta short put/synthetic covered call. As usual, the trade off is the upside risk aspect of the setup, which will have to be managed as any other oppositional setup would in the event that the underlying rips through the short call strike.
In any event, I've collected 2.86 in credits so far, which would mean my cost basis in any shares assigned via the 32 short put would have a cost basis of 29.14 versus 28.98 spot, so it's slightly underwater at the moment.
Like a covered call, I'll look to roll the setup out as a unit when the short call approaches 50% max.
* -- The net delta on the position can be made "shorter" by setting it up closer to at-the-money; "longer" by setting it up farther away. Generally speaking, I like to sell the 25 delta short call and sell the same strike short put, which generally yields delta metrics in the 40-50 net long area, depending on skew.
Trade active
Rolling out to July "as is" for a .53/contract credit to flatten delta and bring in more extrinsic in this vol expansion. Scratch at 3.39 per contract; cost basis of 28.61 if assigned shares on the 32 shortie.Trade active
Taking a bit of profit here (.77/77/contract) as well as rolling out for further cost basis reduction: rolling to the Sept 20th 32 short straddle for a 1.08 credit; scratch at 4.47; cost basis of 27.53 if assigned on the 32 shorties. Considered opening the straddle up to the 32/33 short strangle, but think that the risk is to the downside short to medium-term given where XOP's at in its range.Trade active
Probably should have taken the opportunity to recenter my risk when I rolled this out post-opex, but doing so now on further strength. Rolling to the Nov 15th 31 short straddle for a miniature realized gain and a .61/contract credit; scratch at 5.08. Will look to take small profit (10% max) and then restart the cycle anew in shorter duration ... .Trade active
Yikes! Oil got totally crushed today, and XOP along with it. Knowing how oil can be (down huge one day, up the next, and vice versa), rolling the call side down only one strike to the 30 for a .30/contact credit; scratch at 5.38. This still leaves the setup net delta long to accommodate a bounce.Trade active
Rolling out to the Dec 29C/31P for a .62/contract credit to cut net delta; scratch at 6.00. Would've rolled down the short call within November, but strikes between 30 and 25 have yet to populate in that expiry.Trade active
Checking on this setup to see whether a post-opex roll needs to be done. Nope -- today's move brings it back to within 30 delta with the value of the inverted at 6.73 versus scratch at 6.00, so will sit on the setup for another cycle ... .Trade active
Rolling to Jan and inverting to the 28C/31P for a .36/contract credit. Scratch at 6.36; 1.21 in extrinsic (mostly on the call side); delta/theta of .75/55.29; cost basis of 31 - 6.36 or 24.64 if assigned on the 31 shorties versus 24.96 spot.Trade active
Rolling to March and inverting to the 27C/31P for a .42/contract credit. Scratch at 6.78; .83 extrinsic; delta theta of .54/73.28; cost basis of 24.22 if assigned on the 31 shorties. The way to look at this play at this point is that it's a March 20th 27 covered call. Because my cost basis is 24.22, I can roll the short calls all the way down to 25 and still make money, but am taking a more incremental approach in the event that this ever pops up off of lows, in which case the directional nature of the net long delta in the position will benefit the trade.
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