Tuesday, September 1, 2015

XOP Analysis

Update 9/24/2015: XOP exceeded half its potential value and I exited to mitigate further time risk. I'll look at opening another position on Friday.

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
Implied volatility stands at 60.9%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. XOP’s volatility stands in the 85th percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

Iron condor, short the $40 calls and long the $42 calls,
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.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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