XOP: THREE BULLISH ASSUMPTION PLAYS IN ADVANCE OF OPEC TALKS
With XOP hanging around horizontal support here and with OPEC output cut extension talks and jawboning on the near-term horizon, it only makes sense to talk about petro plays with a bullish assumption, particularly due to XOP implied volatility rank (in the 74th percentile over the past six months) with background implied volatility at 34. Here are three:
LADDERED SHORT PUTS/SHORT PUT VERTICALS
The most straightforward of the strategies with a neutral to bullish assumption.
Example:
June 16th 33 short put
July 21st 32 short put
.97 credit at the mid
These are currently setup at the 20 delta strike. Look to take profit at 50% max, either one at a time, or for the setup as a unit. Generally, no intratrade defense. Toward expiry, look to roll out for duration and credit on test.
A defined risk variation on the nakeds, laddered short put verticals:
Example:
June 16th 30/33 short put vert
July 21st 29/32 short put vert
.64 credit at the mid
As with the naked short puts, look to take profit at 50% max, either individually or for the setup as a unit. Generally, no intratrade defense. Toward expiry, look to roll out for duration and credit on test.
POOR MAN'S COVERED CALL
Example:
Sept 15th 90 delta 28 long call/June 30th 30 delta 37.5 short call
7.28 db at the mid
Here, you're looking to reduce cost basis in your back month, long-dated option over time by rolling your short call out for duration and credit. With these, look to take profit at 10-20% of what you put it on for, taking into account any credits you received for rolls. Intratrade, look to roll out the short call when it's lost 50% of its value.
LIZARDS
There are several variations, all of which involve receiving credit for the entire setup that exceeds the max loss that could be experienced by the short call side.
Example (Naked Short Put + Short Call Vert):
June 30th 34/37.5/38.5 Jade Lizard
1.10 credit at the mid
BE at 32.90 (below expected move)
Example (Short Put Vert + Short Call Vert):
June 30th 31/34.5/37/38
1.02 credit at the mid
BE at 33.48 (above expected move)
Max Loss/Buying Power Effect: 2.48
Look to take these off at 50% max. Intratrade defense can be done by rolling the untested side toward current price to the extent it's productive. Toward expiry, look to roll the tested side out for duration and credit and to sell an oppositional side against for a credit that exceeds what you paid to roll, although it's generally just a walkaway trade if price blows through your short call side, since the max loss that can be experienced by that side will be less than what you collected in credit up front (i.e., all the risk associated with these is on the put side).
LADDERED SHORT PUTS/SHORT PUT VERTICALS
The most straightforward of the strategies with a neutral to bullish assumption.
Example:
June 16th 33 short put
July 21st 32 short put
.97 credit at the mid
These are currently setup at the 20 delta strike. Look to take profit at 50% max, either one at a time, or for the setup as a unit. Generally, no intratrade defense. Toward expiry, look to roll out for duration and credit on test.
A defined risk variation on the nakeds, laddered short put verticals:
Example:
June 16th 30/33 short put vert
July 21st 29/32 short put vert
.64 credit at the mid
As with the naked short puts, look to take profit at 50% max, either individually or for the setup as a unit. Generally, no intratrade defense. Toward expiry, look to roll out for duration and credit on test.
POOR MAN'S COVERED CALL
Example:
Sept 15th 90 delta 28 long call/June 30th 30 delta 37.5 short call
7.28 db at the mid
Here, you're looking to reduce cost basis in your back month, long-dated option over time by rolling your short call out for duration and credit. With these, look to take profit at 10-20% of what you put it on for, taking into account any credits you received for rolls. Intratrade, look to roll out the short call when it's lost 50% of its value.
LIZARDS
There are several variations, all of which involve receiving credit for the entire setup that exceeds the max loss that could be experienced by the short call side.
Example (Naked Short Put + Short Call Vert):
June 30th 34/37.5/38.5 Jade Lizard
1.10 credit at the mid
BE at 32.90 (below expected move)
Example (Short Put Vert + Short Call Vert):
June 30th 31/34.5/37/38
1.02 credit at the mid
BE at 33.48 (above expected move)
Max Loss/Buying Power Effect: 2.48
Look to take these off at 50% max. Intratrade defense can be done by rolling the untested side toward current price to the extent it's productive. Toward expiry, look to roll the tested side out for duration and credit and to sell an oppositional side against for a credit that exceeds what you paid to roll, although it's generally just a walkaway trade if price blows through your short call side, since the max loss that can be experienced by that side will be less than what you collected in credit up front (i.e., all the risk associated with these is on the put side).