Trade Details & Summary

APC Strangle (LIVE Closing Trade)

Took about $150 out of this small APC strangle trade even after the stock moved completely against our call short strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.


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  • Pete Allen

    This was just what I needed to get my head around profit target, P/L, how to close the trade and how you used IV to help in the decision-making process for supporting the buy decision. Thanks a ton Kirk!

Show Video Transcript +

In this video, we’re going to go through a possible closing trade that we have that we’re going to put on here in APC which is Anadarko Petroleum Corp. This is a strangle trade that we had initially entered in the back on I believe 3/3, March 3rd of 2016.

You can see that’s the time that we got into this trade. Initially, in APC, we went ahead and sold two strangles, took in $123 for each of those strangles that we sold, and now you can see that the new mark or the value of that strangles is down to just $50 per strangle.

We’re looking at about $148, $149 profit on those trades right now. That meets our profit potential and profit target. Now remember, with this strangles, what we’re looking to do is close out these trades when the premium that we received gets cut in half by 50%.

When we collect 50% of the premium received initially which is $123, that will put us at a profit target around $61. And we reached that today when the market opened. You can see the value of these options dropped $27 today which created that potential for us to make some money on this trade.

We’re going to go in here now, now that it’s reached our profit target, and go ahead and place a closing trade on APC. All we’re going to do is just right-click on this strangle, go down and create a closing order, and go over to buy both of this strangles back at a $49 debit.

Now, that's where these options are trading for right now. You can see they’re actually off the chart here on the pricing tab because we’re still so far out. But this strangles in APC is trading for $49. If we want to do a fill price of $50, it might be a little bit quicker.

The market is trading around at $49, but you can see now it traded up to $50. I think $50 might be a little quicker fill, so I’ll sacrifice the dollar for each of these contracts to get out at $50. We’ll go ahead and place that order, see if it doesn’t get filled pretty quick. And it just did almost instantaneously. You can see here this is all live, real-time trading.

We went ahead and got filled here with this APC order almost immediately, actually at $49. We got filled at $49, so actually it’s still a dollar below where we wanted, even though we offered $50. That’s good. That doesn’t always happen that you get filled a little bit better, but sometimes it does.

We’re out of APC now. This trade ended up working out, despite the fact that the stock moved against us since we entered the position. We entered the original position back here on 3/3 and the stock since then has moved against us to the top side. It’s been up about $6 or so at the height of it.

Now, we have an opportunity to make some money because of this drop in implied volatility. That’s the key to everything that we do. That drop in implied volatility allowed the decay of the options to come in because remember, as implied volatility drops, so do the value of all options across the board, regardless of the directional move in the underlying stock.

Again, another example of how we’re walking the walk and talking the talk here at Option Alpha. An excellent closing trade in APC and a nice little profit.

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