Paragon Options is a service that focuses exclusively on futures and ETF options. By doing so we are taking advantage of superior premiums compared to stock options and asset diversification offered by futures. Paragon Options is a directional options service that focuses on Sectors – Indexes, Metals, Energies, Bonds, and Commodities. CLICK HERE to learn more.
Back in October we put on a trade for the newer subscribers to our Paragon options service.
We were conscience of the elevated volatility in S&P options, with the pending US election and still lots of uncertainty around Covid. With this is mind we wanted to enter a play that would take advantage of any fall in volatility without taking on too much risk.
Market conditions
The S&P had been trading in a range of 3300 to 3600 for a few weeks with a couple of wild swings in that time. This had elevated the implied volatility of ES (S&P futures) options to around 22%. We felt this was an attractive level to be a seller at
The structure
We opened a strange, selling 6 of the December 3000 puts and 6 of the December 3700 calls, giving us a 700 handle range in which we could be correct, as well as using strikes that were outside of the current market range. With December two months out, there wasn’t too much time decay yet, but we knew it would start to accelerate.
The trade can be seen below:
A quick explanation of a strangle – To set up a strangle you need to sell (short) an out of the money put and an out of the money call, this should generally give you a delta neutral position that is immune to price movements, leaving just implied volatility changes and time to affect the position. Our strangle was set up for a $76 credit. Meaning we took in $3,800 per strangle and we opened 6 ($22,800)
We held this position into the start of November, by which time we were showing some profit and the S&P was also looking more bullish. At this time we decided to make an adjustment to the original position to try to capture more profit and also reflect the more bullish tone to the underlying.
We decided to buy in our short 3000 puts as they had lost a lot of value from the underlying moving up, as well as having a month’s worth of time decay elapse on them. We bought them back to close, and opened 6 at 3350, capturing a further premium of $24, $1,200 per lot. You can see the adjustment here:
The effect of this was to take in further cash as stated above, but it also made our delta slightly more positive, meaning the position was overall slightly more bullish. The $24 also meant that on top of the $76 initially taken, we now had a further $24 credit, giving us a total of $100 for the trade. Should the S&P continue to grind higher, and even go through our strike, the break even on the trade was now 3800 (3700 top call strike + $100 credit).
This gave us a sufficient amount of room on the trade, and from here we ran it into the expiry.
At the start of this week the S&P was once again looking strong and was close to 3700, with this is mind and not wanting to give back any premium, on a small pull back on Monday, we exited the position, just four days before the expiry. It cost $14 to close the strangle. The trade calculate as follows:
Initial trade – $76 credit
Adjustment – $24 credit
=$100
Exit – $14 debit
Total – $86 per lot profit x 6 lots = $25,800 profit
Summary
A very nice, low delta trade, that was never really in trouble throughout its duration. The lower strikes were never troubled and even though we had a few small breaches of the 3700 level, with our breakeven at 3800, we always felt comfortable in the trade.
Trading options positions doesn’t always have to be directional as this trade shows. This position had almost no delta (directional bias), and simply made money as volatility fell during the rally, as well as time decaying the options away slowly.
Paragon Options is a service that focuses exclusively on futures and ETF options. By doing so we are taking advantage of superior premiums compared to stock options and asset diversification offered by futures. Paragon Options is a directional options service that focuses on Sectors – Indexes, Metals, Energies, Bonds, and Commodities. CLICK HERE to learn more.
18th Dec 2020