Rolling An Inverted Short Strangle

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Short strangle: Tonight, we’re going to go over all of the trades that we made on Tuesday, December 9th. We didn’t have any trades yesterday, so no video yesterday, just didn’t get anything filled. And just as a heads up, we try to stay a little bit more passive and patient when it comes to making trades when implied volatility is minuscule.

We don't have as many trades when IV is low, and the markets are high, and we ratchet it up when implied volatility is high. Probably some of the videos that you can go back to the archives and see, we’ve done anywhere between 15 and 20 trades on days where the VIX is over 20 or 30 or whatever the case is, so just as a general rule.

One quick announcement: If you haven't signed up for the webinar, there're a couple of spots left, I haven't updated the webpage, I think there are maybe four or five seats left for the trade adjustments webinar. But we’re going to go through one trade adjustment tonight in GLD, and that’s going to give you a little bit of a taste of what we’re going to do on that trade adjustments webinar.

You can either sign up for a premium membership and save a little bit of money because we’re going to be doing another webinar not this Thursday, but the next Thursday in December trying to fit two webinars in before the end of the month, talking all about directional debit spreads, so making directional trades, how we place them, what timeframes we use, what strikes we use, what type of credit that you want to receive or what type of debit you want to pay.

All of that, we’ll be going over in the next webinar, not this Thursday, but the next Thursday. But if you haven’t had a chance to sign up for the trade adjustments webinar, I suggest you do. Like I said, I think there are only four spots left; I haven't updated the web page to reflect that.

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In tonight’s video, I want to go over the adjustment trades that we had today. We only had three changes that we had sent out. And the first one was a combo order in XOP. We had an inverted strangle in XOP, the 49 calls, and the 67 puts. And when XOP and oil opened up this morning, actually a lot of those opened up lower. Oil opened up dramatically lower and completely reversed throughout the day. And as a result, things like XOP and RIG and USO all opened up much lower and then reversed higher.

This ended up being pretty lucky on our end, and it’s nothing more than just luck, being in the right place at the right time. But we were able to roll our entire strangle out to January from December earlier in the morning, and we took in a massive credit to be able to do that. A pretty good credit considering that it's only the 67 puts were deep in the money, so to be able to roll those out for no credit or no debit was pretty good, and that's why I like the trade.

Again logistically, the way that we did this has we used the sell order of a calendar. We used a calendar to facilitate the role of our short options. Remember, when you're selling a calendar, you are selling the back month which is the January, and you’re buying the December which is that front month. Now, in this case, we were already short the December 49 calls, so when we bought the December 49 calls, we closed out of that position and then we resold that same strike for January.

You can see how this calendar facilitates that roll from December to January. Now, when it came to the call side, we were able to take a very nice credit of $.92 for each of those calendars that we rolled. That $.92 helps expand the breakeven points on this strangle, helps move it out even more than it is right now. Same thing on the put side.

What was great about this deep in the money put… Because remember, XOP is trading in the mid-40s and our put is actually at 67, so it’s very, very deep in the money our put option that was short. But we were able to roll this out to next month for no credit, no debit for basically zero price, so the same price that we have it now, we rolled it out to January.

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And why this is important is because it's showing you that actually, front month implied volatility is much, much higher on XOP than back month for the put options. In this case, that front month implied volatility is about the same as a back month. There’s no advantage right now for anybody who's buying put options to go January versus December. There’s no price difference, no time or volatility difference. It’s about the same price.

That was excellent that we were able to do that and get filled pretty quickly, and I know everyone else got filled pretty quickly on that as well. And going to the chart here and we’ll get back to GLD which is on the screen. But going to XOP, you can see here I’ve got implied volatility down in bottom screen here, and you can see implied volatility is up in the 93rd percentile right now.

It’s extremely high, and we had a very nice rally off of the bottom, so we want to see as we start to get towards January which is all the way out here now, so we've given ourselves a lot more time to be right. We want to see oil start to trend higher than it’s going right now. And it’s got a pretty big window that it can land in. We don't need it to go necessarily to 67, whatever the case is. But this is our new window here with oil. We like oil to trade anywhere between about 43 and about 73 or so.

That's the ideal range. Adding up all the credits that we’ve received in this position, we’d ideally like to see oil trade anywhere between that range. It’s quite a big range. The best range that it can trade in to maximize what's left in this position is somewhere between 49 and 67. That’s ideally where we want it to go, and you can see we've definitely got a little bit of upward movement to get to that point till we maximize the potential of this position, but that gives us an excellent opportunity to extend the trade that we have and move it out to January, buy ourselves a little bit more time.

When we look at the other trade that we adjusted today in GLD, I like this adjustment in GLD for two reasons. One, it’s the second adjustment that we’ve made to GLD, and all of them have been pretty good as far as taking in a pretty decent credit for the options. The second reason I like this adjustment is that it reduces our max loss that we could have at this point and it gives us some extra money in case we are right, and GLD falls in the last 8 to 9 days here before expiration.

It gives us more credit to beef up the position that we had. And we’ve done an exquisite job this month trading GLD. We had that nice straddle that we made some money on, so hopefully, this position in GLD will work out as well. I want to go through the position before the adjustment which is what you guys see on your screen right now. This is the position that we had in gold before we made that adjustment.

And then what I want to do is add the other adjustment that we made today. And this goes along with what we’re going to do, just much, much more in depth with a bunch of different strategies in the trade adjustments webinar coming up on Thursday. But this is the position that we had in GLD, and you can see it’s an unbalanced condor. We initially added this extra leg over here to the position, so we had a little stair-step iron condor going from our original position.

But now, gold is all the way up over here, so you can see that on the topside of our trade, we’re getting tested to this side. Gold is continuing to move much, much higher and today it was up almost $1.5 I believe GLD was, so none of our risks is real to this side. We could have gold fall from 118 down to 111; it could drop almost $7, and we’d still be okay. We’d be testing this side, but we’ve got a much bigger range, and that's not where the risk in this trade is.

Now, the danger in this trade is, of course, if gold continues higher. If gold continues higher and expires above 120, we stand to lose at this point about $318. That's the real risk that we would lose if we kept this position as is before the adjustment. If gold settled into a little bit lower of a range from here, we’d make about 282. A little bit less than 50-50 bet, so we’re doing a little bit less than $1 for every $1 that we’re putting up at risk.

Now, with today's adjustment, what we decided to do is add another put spread to this side of the trade. We add another put spread to this side where our risk is not and that helps shift this entire profit loss diagram over to the right, that helps bring this breakeven point from here a little bit further out. It gives us a little bit more room based on the credit that we received and it also moves up our max loss on both ends of this trade. Both ends of this trade, it moves up our max loss, so that if

God forbid, GLD does move outside of this range right now and doesn't settle into a little bit lower of a trend before expiration, at least we’re going to lose money. And that’s the whole key with trade adjustments, is everyone wants to make money with adjustments. And you can make money with adjustments, but the key with trade adjustments is to reduce your risk. That’s your number one goal. You got to play defense. And it’s like being in a hospital.

If somebody comes in and they’re bleeding on the table, (which is your trade, it’s bleeding, losing money) the first thing you do is stop the bleeding, then you can worry about saving their life. But you can’t even save their life unless you stop the bleeding. That's really what trade adjustments are about, is about stopping the bleeding, reducing the risk wherever possible, and that's hopefully what we get across with these videos.

Once I add the adjustment that we had, the 116/114, now you can see how it creates another layer to this iron condor. Now we've got a couple of little stair steps, but what we did has we added that side to the trade right here, and this gives us another credit that moves out our breakeven point further, so now our breakeven points all the way out here gives us about $1 of extra room in GLD.

We did give up a little bit of downside possibility here, but our risk isn't to the downside at this moment, and with so little time left to go till expiration, I feel comfortable making this trade a little bit closer because it pins GLD into a tighter range which it should trade in between now and expiration. Now, what’s great about this is that now, if GLD stays anywhere between 116 and 118, we could make $393, and if it God forbid goes all the way above 120, instead of losing about 318, now we lose about 207.

You can see how much we’ve reduced our potential risk on this trade just by making this one adjustment. A cool adjustment, it's a little bit more advanced, so if you’re a beginner, just take your time, maybe watch this video one or two times. But you can see how we’re just continuing to make adjustments and reducing our risk all along the way from our original position.

As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them right below this video. I’ll make sure I get back to all of those tonight or tomorrow before the open. And if you're watching this video somewhere else out there online or on YouTube, you just have to understand that this video and these alerts are coming out publicly about 15 days after they're sent out to our members.

If you want to get real-time trading alerts and this video every night that goes through all of the trades that we make, open, close, adjustment, you’ve got to sign up for a membership at 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.