THE WEEK AHEAD: USO, XOP, XLE DOWNWARD PUT DIAGONALS
While I'm waiting for my August monthly premium selling plays to grind out, I'm pounding the pavement for potential directional plays to get in on. Late last week, I shorted TLT at the 122 horizontal resistance level I alerted last week via the inverse TBT, (See TBT Upward Call Diagonal Post Below), so I'm looking for fun in other places, one of which is in USO, XOP, or XLE (pick your poison).
Granted, USO is pesky and hard to work with due to its size. Nevertheless, it's a good small underlying that small accounts can potentially work without it causing too much pain in the event things don't go your way.
This week, I'm eyeing the resistance level at 16 for a long-dated bearish assumption setup. Naturally, you can do a risk one to make one, static one-off spread to play it (i.e., a short call vertical or a long put vertical wrapped around 16 if we hit that level), but I generally opt for setup flexibility in the event I feel I need more time for the play to work out and/or to reduce cost basis, and my go-to setup for that is a diagonal. Pictured here is an Oct/Jan 14/19 downward put diagonal, with the following metrics:
Max Loss on Setup: $370/contract
Max Profit on Setup: $130/contract
Break Even on Setup: 15.30 vs. 15.06 spot
Debit Paid/Spread Width Ratio: 74%
Take Profit: 20% of debit paid or $74
Naturally, if USO gets to 16, some adjustment to the setup will be required, so this is just an example of the setup I would use (i.e., (1) setup break even at or above spot; (2) debit paid/spread width ratio of <75%). The other thing to note is that I'm not particularly fond of going out to October for the front month. Currently, however, no Sept expiry is available and the Aug 17th 14 short put strike is paying a paltry .20. Consequently, I can potentially see (a) just buying the ~90 delta long put back month if we hit 16 and then subsequently legging into the short put aspect on a meaningful drop; or (b) buying an Aug/Jan setup in spite of the paltry .20 received for the 14 short and then rolling the short out in time to bring in more credit if we get a drop in price such that the 14 strike brings in a significant credit (I generally opt for the latter; some cover is better than no cover at all, even if it is a lousy $20)).
Natural alternatives would be a similar setup in XOP on a hit of overhead horizontal resistance at 44.50-45.00. There, however, I'd probably go with my standard "skip month" diagonal: preliminarily, the Aug/Oct 41/48 costs 4.84/contract to put on, has a nice 2.16 max profit on setup, a break even of 43.16 versus 43.06 spot, a debit paid/spread width ratio of 69.1%, and a 20% take profit of $97/contract.
Similarly, XLE overhead resistance is between 79 and 80: preliminarily, the Aug/Dec (no October monthly available) 73/86 costs 9.86/contract to put on, has a max profit on setup of 3.14, a break even of 76.14 versus 75.94 spot, a debit paid/spread width ratio of 75.8%, and a 20% take profit of $198/contract. That 75.8% metric is a bit more than I'd like to pay, but the trade off is having more roll opportunities to reduce cost basis and improve my break even.
OTHER PENDING ALERTS:
IWM SHORT, DOWNWARD PUT DIAGONAL/POOR MAN'S COVERED PUT AT ~170 or QQQ SHORT, DOWNWARD PUT DIAGONAL/POOR MAN'S COVERED PUT AT ~177 (PRIMARILY TO ADD SHORT DELTA TO COVERED CALL PORTFOLIO).
GLD BULLISH ASSUMPTION SETUP AT ~115 OR GDX BULLISH ASSUMPTION SETUP AT ~21.
Granted, USO is pesky and hard to work with due to its size. Nevertheless, it's a good small underlying that small accounts can potentially work without it causing too much pain in the event things don't go your way.
This week, I'm eyeing the resistance level at 16 for a long-dated bearish assumption setup. Naturally, you can do a risk one to make one, static one-off spread to play it (i.e., a short call vertical or a long put vertical wrapped around 16 if we hit that level), but I generally opt for setup flexibility in the event I feel I need more time for the play to work out and/or to reduce cost basis, and my go-to setup for that is a diagonal. Pictured here is an Oct/Jan 14/19 downward put diagonal, with the following metrics:
Max Loss on Setup: $370/contract
Max Profit on Setup: $130/contract
Break Even on Setup: 15.30 vs. 15.06 spot
Debit Paid/Spread Width Ratio: 74%
Take Profit: 20% of debit paid or $74
Naturally, if USO gets to 16, some adjustment to the setup will be required, so this is just an example of the setup I would use (i.e., (1) setup break even at or above spot; (2) debit paid/spread width ratio of <75%). The other thing to note is that I'm not particularly fond of going out to October for the front month. Currently, however, no Sept expiry is available and the Aug 17th 14 short put strike is paying a paltry .20. Consequently, I can potentially see (a) just buying the ~90 delta long put back month if we hit 16 and then subsequently legging into the short put aspect on a meaningful drop; or (b) buying an Aug/Jan setup in spite of the paltry .20 received for the 14 short and then rolling the short out in time to bring in more credit if we get a drop in price such that the 14 strike brings in a significant credit (I generally opt for the latter; some cover is better than no cover at all, even if it is a lousy $20)).
Natural alternatives would be a similar setup in XOP on a hit of overhead horizontal resistance at 44.50-45.00. There, however, I'd probably go with my standard "skip month" diagonal: preliminarily, the Aug/Oct 41/48 costs 4.84/contract to put on, has a nice 2.16 max profit on setup, a break even of 43.16 versus 43.06 spot, a debit paid/spread width ratio of 69.1%, and a 20% take profit of $97/contract.
Similarly, XLE overhead resistance is between 79 and 80: preliminarily, the Aug/Dec (no October monthly available) 73/86 costs 9.86/contract to put on, has a max profit on setup of 3.14, a break even of 76.14 versus 75.94 spot, a debit paid/spread width ratio of 75.8%, and a 20% take profit of $198/contract. That 75.8% metric is a bit more than I'd like to pay, but the trade off is having more roll opportunities to reduce cost basis and improve my break even.
OTHER PENDING ALERTS:
IWM SHORT, DOWNWARD PUT DIAGONAL/POOR MAN'S COVERED PUT AT ~170 or QQQ SHORT, DOWNWARD PUT DIAGONAL/POOR MAN'S COVERED PUT AT ~177 (PRIMARILY TO ADD SHORT DELTA TO COVERED CALL PORTFOLIO).
GLD BULLISH ASSUMPTION SETUP AT ~115 OR GDX BULLISH ASSUMPTION SETUP AT ~21.
Comment:
USO now showing an available October monthly. An Aug/Oct 14.5/17 downward put diagonal is pricing out at a 1.85 db in the off hours, yielding a .65/contract max profit on setup, a break even of 15.15 vs. 15.06 spot, and a debit paid to spread width ratio of 74%. Could be a good small play, but I still want a smidge higher first ... .
