Selling China FXI Premium While It Lasts

Download The "Ultimate" Options Strategy Guide

Short premium option strategies: In tonight's video update, we're going to go through all of the trades that we made for Monday, July 27th. It was still a busy day. We have lots of new opening trades. We had one closing trade and a couple of earnings trades that we're going to go over tonight.

So as always, if you have comments or questions, please ask them right below inside the membership area right on the trading learner page. That way everyone has an opportunity to, obviously, see the questions, respond, get answers. It just helps out the entire community of pro and elite members that we have here. 

Related "Short Premium Option Strategies" Resources:

short premium option strategies

The first one we're going to go over real quick is just our close of our FXE Iron Condor. This was an iron butterfly that we closed out of in FXE. This was our bigger position that we added about a week and a half ago when FXE was starting to crash in a hard way.

The stock bounce or the ETF bounced back and then now it's started to go back down a little bit. So we closed out a part of our position in August and bought the entire iron butterfly back, in this case for a nice 306 dollar profit that's just taking our trading system and continuing to take things off early at a nice low profit.

Now, this thing was centered right around 39, so you can see even though implied volatility popped today, the fact that the stock is moved back inside of the range and sitting right at where we want it to be for August expiration helped this thing turn into a nice, quick profit.

Taking money off the table and it's a nice big profit.

Watch Me Place REAL Money, LIVE Option Trades: Here at Option Alpha we "walk the walk" and "talk the talk" when it comes to options trading on a serious, professional level. In this new module you'll find an insane resource of live, real-money, real-time options trading examples.

We recorded our screen in real-time so you can watch over our shoulder as we scan for, enter, adjust and exit options trades. Click here to view 50+ live trades ?

As far as new trades go, we made two new earnings trades. One in BIDU and one in DD. The first trade in BIDU we did an iron condor far out on the weeklies. Again, the tag here is July 5.

That 5 doesn't mean anything about July other than it's the fifth weekly options. These options expire the fifth Friday in July, which would be this Friday. It's always the front month contracts. What we did is we did the 220/225 call spread above the market, and 180/175 put spread below the market for a nice $1.50 credit.

We did it fairly small. I would've liked it to be a little bit more aggressive in BIDU, but I know it's a big mover usually. Implied volatility up in the 94th percentile but with the stock priced around 200 dollars, it's hard to sell a straddle or a strangle on this thing.

The margin is just really, really killer. We have to do a Y Iron Butterfly. And again, what we're trying to do here with BIDU is get the expected move. You can see the expected move was about 16-17 dollars.

The stock closed today around 197, so by us placing the trade down around 180 we got just outside of that expected move on the lower side and obviously a little bit more than that on the top side. Now after-hours trading, the stock was trading to around 182 or so in a kind of after-hours sessions.

It should look like it's going to be a nice profitable trade tomorrow when the stock opens, but as always, we don't know where these things are going to open tomorrow. Obviously, we'll play it by ear and keep you guys updated. The next earnings trade that we made is in DD.

We did the same thing, trying to do the same thing as we did in BIDU except the stock is a lower priced stock. It's a 57 dollar stock, so we were able to sell the straddle right over the market.

Again, purely because it's not going to require a lot of margins to hold this position, and DD had high implied volatility, so we did the 57 call right over the market and the 57 put, so we did the straddle right at 57.

We took in a nice credit of about a $1.98, which gets us outside of the expected move. Here's what Dupont looks like. You can see the stocks been on a little bit of a drop, so we're just playing this just a little bit bullish. See where the stock goes.

But implied volatility up in the 90th percentile. Well implied volatility. Option pricing was really good as well. For DD we got about $1.95 premium which takes us more than the expected move.

I'm not sure if this was exactly calculating the expected move correctly but the trade price that we got at $1.95 takes us a little bit beyond that expected move, and we'll see what happens tomorrow when earnings are fully announced here for DD. Couple other new trades that we got into, a good variety and mix.

We did some more iron butterflies in FXE and FXI. I'm trying to convert the system over to start tagging these iron butterflies as iron butterflies instead of iron condors. You can see that just started happening today. Hopefully, in the future going forward, anything we do that's an iron butterfly where we're selling options right at the money, almost like a straddle.

Again, selling options right at the money. I'd say the 40 strike here. That's what we did in this case with FXI. We sold options right at 40 and then we bought puts at 30 and bought calls at 50. Again, it creates the butterfly pattern, but you're doing it with a call spread on the top side, and you're doing it with a put spread on the bottom side.

Okay? It creates that iron butterfly type feel. It's iron condor order that goes in. You can't place an iron butterfly order, but that's how we're going to start tagging it just so that it helps people with some of the confusion that's happened as we've been doing a lot more of these. Okay?

In the case of FXE and FXI, pretty straightforward. We sold options right at where the stock was trading or very close to it, went out 10 dollars on either end, so plus or minus 10 dollars on either end and bought protection down at the 99 puts and up at the 119 calls.

We took in a credit of about 349 on FXE, and on FXI we took in a little bit bigger credit of about 360 just because pricing was a little bit better. Same thing happened here down below with XOP.

We went ahead and did the iron butterfly of 10 dollars wide on XOP as well, and we sold options right at the money, the 38 calls, the 38 puts, and then went out 10 dollars on either end, bought the 48 calls and bought the 28 puts and took in a massive credit on XOP, 447 dollars.

By far, the biggest credit of the three but we want to diversify out among these different positions. And again, the reason that we did this in all of these is that implied volatility is now jumped again. Right? We're starting to see the jump back up in implied volatility and FXI.

We didn't know if it was going to happen as soon as it did, but it did. And that's great. Same thing with FXE. We're starting to see implied volatility rise is FXE. And in XOP, this is a stock that we haven't traded in a long time because implied volatility has been real, really low.

I mean, look how low implied volatility's been. It's only been in the last week or so as the stock has kind of.. Or, the ETF has kind of come down that implied volatility has cracked above that 50th percentile for us to get into some short premium type positions.

I like starting to fill the coughers here with a little bit of premium in oil and gas exploration. USO is another one that we're looking at. Pricing in USO was not as great as XOP, but it is one on our radar. Same thing with Gold.

Gold is starting to now shoot up in implied volatility as it starts to drop so these are going to be trades that are on our radar for the next week or two weeks here that we're going to start to start building positions in and diversifying out as much as we possibly can.

The last one that I want to go over real quick tonight is DIA. This was a call-credit spread. I love this position because it gets at the heart of what we talked about, not only on the weekly strategy call just last week with elite members but also what we talked about on the open Q&A call with the lead members last week as well.

And that's this idea that you have to be compensated for the actual risk in the trade. What I like about this trade is at the time that we made this trade, and I said this in the alert, the 180 strikes that are right here. Our short strike on this had about a 16 . . . I'm sorry.

Maybe an 18 percent chance of expiring. I've got to go back and look at the email, but it was something lower than the 24 that we had. Maybe 19 or 20, something like that. I think it was maybe 20 percent, about 20 percent chance of expiring in the money.

The probability of that, it would lose money at expiration, about a 20 percent chance. What I always say is that whatever this probability is, we'll just say 20 percent, whatever that probability is, our credit has to be that number 20 percent or higher of the width of the strikes.

In this case, if it has a probability or 20 percent chance of being in the money at expiration, that means that we want to take in credit that's 20 percent of the width of the strikes. Well, the width of the strikes that we did, in this case, is only a dollar wide, so we need to take in 20 cents for this trade to be fair and even and well-priced.

In the case of DIA, we were able to take in more than 20 cents, 24 cents, so we were over compensated for actual true risk in the market. Here's a look at DIA. You can see implied volatility has just dipped a little bit lower today down below the 50th percentile.

When we traded it, it was the 50th. But now you can see that the industrials have had a hard time, so we're selling the call spread against that, trying to see if the market can continue to make a move down, at least in this case for our position to start to make money.

But again, the whole idea here is that with these options all the way out in September, the risk in the market here . . . And you can see even right now that the risk in the market is about 21 percent that the stocks are going to be above the 180 level by expiration in September.

We're getting compensated about 24 percent of the width of the strikes, so we got a great deal. There was a lot of liquidities, very easy to get into and out of. But just because it's a really good deal doesn't mean it's going to work.

It just means that we got good pricing long term if we made every single trade like this and got amazing pricing like this, which is rare to find and hard to find, then we'd be doing much better than whatever probability we're targeting.

In this case, it's still probably about an 80 percent chance of winning trade, so there's a good likelihood that we're going to be having a winning trade or managing a winning trade here sometime in the future with DIA. And especially if the market continues to move down, this will very, very quickly turn into a nice profit that we take off. Okay?

As always, if you guys have any questions on the trades we made today . . . I know there was a lot. It's going to be still a very busy week. Lots of earnings are happening, and the market seems to be picking up in volatility.

As always, if you have any comments or questions, please add them right below here. I'll make sure I get back to all of those tonight or tomorrow before the open. And, 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.