X Strangle (LIVE Closing Trade)

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Strangle: In this video, we’re going to go through a closing trade that we have here in X which is US Steel. That's the position that we’re going to cover today. Now, this was an original strangle that we entered a little while back. We’ll get into the details here in a second.  But now, it's reached a profit target today after it fell this morning by almost $1.

It’s still falling right now live trading. It’s reached our profit target level, and now we’re going to go ahead and enter the order to close it. Again, this is all live real-time trading, no paper money, fake money; this is my real account, real money that we do here. And we haven’t entered this order yet. We don't have any fills today here. You can see there are no filled orders that we have.

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Here’s the deal with X. We went ahead and originally entered this trade back on 3/4, that was March 4th of 2016, initially sold a strangle in X because implied volatility was a little high, and we sold each of these three strangles for $72 each. Now, the mark or the current price of this strangles together is about $24, $23.

Now, our guideline is to take profits at about 50% of the value of the original trade. Half of that $72 that we took in, it puts us around $36, $35 as a profit target. And again, the value of the options early this morning when the market opened dropped below that level. Now, we’re comfortable taking money off the table, and we can bank a quick little $142 profit on this trade.

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When you look at actually the chart of X, what you'll notice is that the stock has moved against us a little bit. But in that period, implied volatility has dropped. Here was the original entry point that we had on X, and you can see implied volatility was around 60. Implied volatility fell, that’s our edge in trading always, so we got that nice drop in implied volatility.

The stock moved against us. It moved against us to the top side and continued to rally, but because of that drop in implied volatility more than overshadowed the actual move directionally in the underlying stock, that’s what created this potential for a profit.

All we’re going to do to go in here and close out this trade is just go to our monitor tab, at least on Thinkorswim, and we’re going to right-click on this strangle order, go over to closing, and then just hit the buy closing order. And that’s going to bring up this order entry dialog box here which now we can set our price. Now typically, what we like to do a lot with our orders is establish the price around where the market is trading right now. And again, with this unlock feature here in

Thinkorswim, you can see exactly where mid-price or original price is for the market. We’re going to go ahead and set this order at 24. It’s trading at 25, so we’ll try to buy it back for a little bit cheaper at 24. Again, we’re buying this back, so we want to buy it back for as small of a potential premium as possible and see if this thing doesn't fill quickly.

Again, we’ve got a lot of time between now and April expiration. There’s still 25 days to go between now and April expiration, but we still want to close out this trade because we've made a big chunk of money here really quickly. By entering this position and cutting off the rest of the time, we guarantee that we’re out of this thing with a nice little winner.

You can see that that order is now working here for X, to buy it back at 24. Currently, the market is 23 ½, so it’s trading for less than what we’re willing to offer which is interesting because usually, these fill pretty quickly. But we’ll pause this video for a second here, come back and see if we can’t get this thing filled here relatively quickly.

Alright, we’re a couple of minutes here after we entered this order in X to close out and you can see that the order just got filled at 11:31. We did have to wait just a little bit between the time that we entered the order and the time we got filled. And I think that's a key point, is that you just have to be a little patient. It didn’t fill right away, it took a couple of minutes to load, but at the end of the day, we are out of X with a nice profit as we showed you, and onto the next trade.

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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.