FXE Strangle (LIVE Opening Trade)

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Strangle: In this live trading video, we’re going to look at entering a new trade in FXE which is a euro trust currency ETF. I’ve wanted to get into FXE for a little bit here, but I’ve been waiting for a little bit more of a pullback. And today, the ETF is down and gapped open lower this morning. Again, this is all live time, real-time, real money, real trading, no paper money.

But you could see the ETF gapped down here. It’s Monday at the time that we’re recording this video, just a couple of minutes after the market opened. And you could already see that there’s live pricing, so pricing is going to move around a little bit. But with our portfolio right now, we've got a lot of trades on for March expiration at the time of this video, and we want to start building on our April portfolio.

We did so last week by entering some new trades, and in this week, we’re going to continue to do so. And I like FXE. This is one of the ones that we filter out on our watch list as having well-implied volatility, and we know that it's got a pretty decent volume and liquidity most of the time.

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We’re going to look at making a trade here in FXE by selling a strangle around where the stock is trading. Now, implied volatility is in the 69th percentile. It means it's very high right now. It's not insanely high, so we don't want to do an aggressive strategy like a straddle where we sell at the money spreads, but we want to do still a net option selling strategy.

In our case, we’re going to use a strangle, you could easily do an iron condor, we’ll show you how to convert this trade into an iron condor here. But we’re just going to go over to the trade tab here, we typed in FXE already, and we’re going to open up the April options. Now in our case, the March expiration options, these are the monthly contracts, not the weeklies which you can see here.

The monthly contracts have about 18 days to go in March. That’s way too close. We’re going to go out to April, that's just far enough out for where we like to be entering these new trades, about 46 days out, and we’re just going to scroll down here and look and see what we can get.

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Now again, markets just opened, so volume is starting to slowly come in on a lot of these, and you can see they’re already being traded, prices are moving around. Where we like to base a lot of our trades is around the 15% probability of being on the money level on both ends. The closest to that right now is about the 102 strikes on the put side, and then on the top side, it’s about the 111 strikes above the market.

Now remember, FXE right now is trading at 106.43, so this gives us a good spread between where the market is trading and where our breakeven points would be on a trade like this. We’re going to go ahead and enter the 102, 111 credit strangle. We’re going to go ahead and right-click on the 102’s. That just brings up the 102’s short.

Then we’re going to hold down CTRL on my end and then left-click on the 111 calls. And that’s going to bring up the entire order here. And you can see the system already knows that it’s going to fall to a strangle order. Now, it recognizes you’re selling one contract of each for April expiration, and we’re doing the 111 calls and the 102 puts.

The credit right now that you can get on that is about $.79. We’re going to shoot for just another penny higher, try to go for a round number which you can do. You can fill it at 79, or you can shoot for about $.80. We’re going to go ahead and confirm and send this order, let it work here while I talk about the adjustment to an iron condor. You can see this order is coming in here and this is all real order. We’ll see if that order gets filled here as we…

And it just did get filled. Okay, you know already the position got filled. We do not have this position arrow, instead of an order arrow. If we go back to our actual trade activity screen, you can see here that that order did, in fact, get filled. Again, this is only a couple of minutes after the market opens. About 10 minutes after the market opens, we’re now into this new trade in FXE.

If you wanted to build this trade as an iron condor, you would do the same thing. You would start with those short legs as 102 and 111. We’re still doing the same thing where we start with that short legs, that 102 and 111. And then what you would do is you would then go out and buy options on either end. You can buy options as far out as you want. The further out that you go, obviously the more risk you’re going to take per trade.

But you can see, we can buy the 111, 112 credit call spread. We’re just going to add long 112’s. And then down below the market, we can add the long 101’s. Now, you have short the 111 calls, long the 112's, short the 102’s, and long the 101’s. And again, you now can see that the system recognizes this as an iron condor trade. Now you’ll notice that your credit is going to go down dramatically. This is the trade-off.

If you have a risk defined account like an IRA or something, you might want to trade the iron condor. You just have to scale up the number of contracts that you’re trading because the credit received is going to go a little bit lower. Now, you can also spread out the width of the strike so that we can make these $2 wide instead of $1 wide. Notice that we just moved out our long strikes.

We didn't touch our short strikes; we moved out our long strikes on either end and now the credit received goes up to $41. Now, you’re going to take in a little bit more risk because you have a $2 wide strike versus a $1 wide strike, but this is a good way to move back and forth between them.

Now again, in our opinion, I think the strangle the best way to trade this because implied volatility is around the 70th percentile. That for us is a good level to do some naked option selling. This is one trade that we just got into right now. We’re going to start looking at adding more to this trade over the coming month. But I always like to space these trades out over time versus just entering five or six contracts at one full swoop.

I don't like that I'll just have one contract right now, but that's the way you can scale into a position slowly. We plan on adding more to FXE over the next month, but we’re just going to start today with one contract. Alright, hopefully, this was a helpful video. As always, if you have any comments or questions, please ask them right below. And until next time, happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.