/CLQ5 short strangle

This is the first post in my shiny new options trading journal. Yippie!

I finally got approved for everything I needed at TD Ameritrade, since I want to keep using the ThinkOrSwim platform. I know it’s a bit heavy on commissions, but the platform itself is just so much better than anything else out there. Someone recommended that I use TOS Paper Trade to analyze everything, but to do the actual trades somewhere cheaper. I decided against this, but I’ll leave my reasoning for another post, since this post is about my first real trade.

Symbol: /CLQ5
Status: opening trade
Strategy: short strangle, JUL 15 47 P /-\ JUL 15 58 C (market at $52.72)
Days to expiry: 7
Max profit: $250

Trade reasoning

Things are not looking bullish for oil, it has dropped over 10% in the last few days. The supposed reasons:

• Iran talks
• Greece turmoil
• Chinese market crash
• EIA oil supply data showed oil inventories rising, while market consensus was for it to fall
• July 4th marks peak of driving season, so lowered USA gasoline demand from here
• Strengthening dollar due to the EUR problems means lower oil prices
• Global oversupply (OPEC, efficient US production, last weeks growth in rig counts)

For my first real trade, I wanted to keep things relatively risk free. Short strangles are unlimited risk trades, so using the words “risk free” is sort of contradictory, but if you’ve been doing non-directional trading, you’ll see that this is about as risk free as things can get:

I have more than 10% leeway on both sides of the current market price, which leaves a lot of room for several adjustments if needed. The red lines show the range I’m shooting for, and the vertical one shows the expiry date.

There will be significant support if the price drops to $50. If it breaks through, I’m still able to adjust the strangle. I don’t see the price going back up towards $60 in 1 week.

I’m pretty far out of the money, with deltas under .10 on both sides of the strangle. I intentionally skewed the trade slightly towards the put side though, because of the general bearish outlook, and the extra volume of put trades in the statistics section.

So this weekend will be interesting, a lot depends on the Greeks 😉

My friend Theta will be hard at work for me over the weekend, but so will the politicians over in Greece. A resolution of some kind is to be expected, otherwise Greece’s banking system will collapse next week.

Also, we might get some news from China as well, but hopefully nothing major.

If nothing significant happens over the weekend, my plan is to roll the legs in a few dollars, to collect more premiums on Monday, and close the trade out on Wednesday morning before the next EIA report.

By the way, I was looking at a similar trade with USO, but the margin requirements were close to 3x that of /CL, when I added enough contracts to reach the max profit of /Cl. I don’t really know why there are such huge differences in margin requirements among the different instruments, have to look into it.

Update #1: 07/13/2015

Nothing spectacular happened over the weekend, in fact, volatility in oil options shrunk. Because of this, I could have closed the initial trade at a $210 profit already.

Instead, chose to keep the existing contract open, and open a new short strangle for /CLQ5 with legs closer to the present market price.

Symbol: /CLQ5
Status: opening trade
Strategy: short strangle, JUL 15 49 P /-\ JUL 15 56 C (market at $52.88)
Days to expiry: 3
Max profit: $150

You can see how the volatility shrunk as compared to the original trade’s option chain above.

And here is the new risk profile:

I still have room to do any adjustments if anything happens. The put leg is 7% below the present market price, and the call leg is 6% above it.

If the price moves upwards, volatility should decrease more, so I’ll be able to adjust at a good price. Conversely, if the price moves down and nears $50, I’ll adjust the strangle downwards.

With the Greece debt crisis looking to be solved, and the Iran talks on schedule to come to an agreement, the only things that could produce major moves would be much higher than expected oil inventory data on Wednesday, or something happening in China.

The monthly OPEC report was published this morning, didn’t paint a pretty picture, so my bearish sentiment on the oil market persists. OPEC produced 31.38 million barrels a day last month, more than its target of 30 million barrels a day. The group also lowered its forecast for demand for its crude this year to 29.2 million barrels a day. They are pumping out more oil than they can sell, and the Saudis are increasing production even further. Global glut continues…

I am still planning on closing both these trades on Wednesday morning.

Update #2: 07/14/2015

A deal with Iran has been struck. Even though the deal was expected, /CLQ5 was going berserk in after hours trading, dropping to a low of $50.98. With trade sanctions lifted, Iran will be a player on the market, but not over night. The soonest they can start unloading their oil is a few months from now, and they’ll only reach max capacity of around 1 million bpd in a year.

Knowing the above, I was surprised to see such volatility in /CL at night. I think all the bearish news affecting the oil market is becoming too much for the traders to handle. The price rose back to above $52 after market opening though.

The API is publishing their report this afternoon, and the EIA tomorrow morning. I’m pretty sure that if there is a negative surprise, oil will tank, so I’m going to start closing my positions as I can.

Original position close:

• JUL 15 47 P closed at 0.02
• JUL 15 58 C closed at 0.01
• Bought at 0.25, so that’s a 0.22 profit

Takeaway: Fall in volatility + 4 days passed meant that $220 out of the max $250 profit could be closed several days before expiry.  It is Tuesday, expiry would have been on Friday. OVX is at 36.93.

2nd position close:

• JUL 15 49 P closed at 0.05
• JUL 15 56 C closed at 0.03
• Bought at 0.14, so that’s a 0.07 profit

Takeaway: This was a very short 1 day trade, but it still made $70. The price didn’t change, Theta was high and the lower volatility meant that 50% of this trade’s potential profits were realized in 1 day, rather than 2.

Trade summary – Profit of $290

I closed off 1 day earlier than I had originally planned, but all the extra news, and the market’s knee jerk reaction to the Iran deal increased my bearish sentiment. I don’t want to get caught under a falling knife if the price breaks below $50, something which several investment firms hold likely.