Wednesday, June 24, 2015

USO - Short Straddle

JUN 23


IVR is low (20). Price appears range bound -- looking for a delta neutral theta trade to add to the portfolio. (Edit: note, this is not the time to sell premium!)

-1c Jul 10 20.5 Straddle for 0.92 credit (-1/c Call @ 0.47, -1/c Put @ 0.45)


IVR is rising (50). Volatility has picked up and the price of oil has moved significantly downward. Two things have happened: volatility in the options have picked up (which works against this position) and price has moved much faster than normal.

The downward move in has the short put is well in the money (now at -1.00 delta). I need to roll the position down and out in time collecting as much credit as possible to preserve this position.

The call is worthless and will be closed to free up buying power.

Because of the pick up in volatility, the large price move, and closeness to the current expiration (Jul 10), I am going to need to move the position far out in time just have a little chance of profit.

At this point, I want to try and repair this trade anticipating that volatility will collapse and the price action will revert to normal, and wait for theta to come in.

Because this is such a significant move in a ETF and the underlying commodity is has already come down this year, I am going to lean the straddle slightly bullish (contrarian), selling a OTM call and slightly ITM the put.

Buy to Close
+1/c Jul 10' Call 20.5 @ 0.01 (Net Credit of 0.46)
+1/c Jul 10' Put 20.5 @ 2.89 (Net Loss of 2.44)

Sell to Open
-1/c Oct Call 19 @ 0.83
-1/c Oct Put 18 @ 1.60  (Together a credit of 2.43)

The maximum profit I can make on this trade (as it sits) is currently 0.45 by Oct expiration.

Ideally, I would have liked to roll the short put further down and for a credit to fully cover the loss on the existing short put. Instead I need help from the sale of the call to repair the loss on the original short Jul 10' 20.5 short put. Plus I have had to go further out in time to Oct expiration to make this work.

The current greeks and risk curve is below:


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