Shares declined by 9.5% over 23 days, or a -150% annual rate. The options positon produced a 105.3% yield on debit, for a +1,670% annual rate.
The SPDR Oil & Gas Exploration and Production exchange-traded fund (XOP) has undergone large price movements of late with options pricing showing expectations of more to come. I shall consider it as a potential volatility play.
The trade was suggested by Tom's Team on the Dough education and trading platform. Their's was a strangle. I chose to add defined-loss wings to the trade, turning it into an iron condor.
[Upstream in Wikipedia]
I shall use the OCT series of options, which trades for the last time 45 days hence, on Oct. 16.
Click on chart to enlarge.
|XOP at 1:30 p.m. New York time, 30 days hourly bars|
|Week||SD1 68.2%||SD2 95%||Chart||Earns|
short the $30 puts and long the $28 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money
The premium is $0.78, which is 34% of the width of the position’s wings.The stock at the time of purchase was priced at $36.67.
The risk/reward ratio is 1.6:1.
The zone of profit in the proposed trade covers a $5 move either way, or 2.9 times the average true range.
Decision for My Account
I've opened a position on XOP as described above.
-- Tim Bovee, Portland, Oregon, Sept. 1, 2015
My volatility trading rules can be read here.
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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
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