/CLZ5 short strangle

I just opened a short strangle position on the December contract of WTI crude oil.

The details of this trade are as follows:

Date Inst. Mark. # L/S Strike C/P Price Δ Days Max profit Comm. Close P/L
1 9/29/2015 /CLz5
(dec)
45.40 2 short 35 P 0.32 0.07 49 $1200 $7.42
2 short 58 C 0.28 0.09 $7.42
2 10/20/2015 /CLz5
(dec)
46.06 2 long 35 P 0.07 0.03 28 $7.42 bought to
close
$900
2 long 58 C 0.08 0.03 $7.42

My previous crude trade is still open, but it’s safe with deltas 0.02 on both legs, so I’m going to let it expire in 2 weeks. This trade is very similar to the previous one.

Trade reasoning

For the last few weeks, oil has been trading in a nice range. The OVX at 49.25 is still high, so you can still get good premium for selling options. Unfortunately, Thinkorswim seems to be acting up, and I can’t get a clear reading on the implied volatility of CLZ5.

Oil had been stuck in a trading range, between $44 and 46. Some believe that a bottom formation is taking place, and WTI is testing $47 to go higher. US production is thought to be increasing soon, since the Baker Hughes rig counts have been dropping steeply in the last few weeks.

By the way, the price of WTI and Brent have converged recently, with the spread narrowing to just around $3. This means that US oil is getting more expensive for some reason, relative to Brent.

Anyhow, here is the chart of WTI and my strike prices.

clz5-chart

I got plenty of room, with a profit range of 51%. Nice! My potential profit is $1200 for 49 days of theta decay, which is nice, since if the price moves against me at some time in the future, I’ll have plenty of premium to adjust the position as needed.

clz5-risk-profile

clz5-option-chain

The broad oil sector is still declining. Some of the stocks I monitor are near to the August flash crash levels, which is just terrible for them. The increase in the price of crude has not affected their share price at all. In fact, when crude increases, the oil companies stock prices stay flat, but when crude decreases, stock prices go down as well. Tough market!

Now let’s sit back, and let the theta decay begin. As always, I set alerts to chime in if either of my strike prices reach a delta of 0.30.

Update #1: Position closed for $900 profit

This trade made a great run, so I decided to close it out today. The entire length of the trade was uneventful and safe, as CL has been trading in a relatively narrow range for almost 2 months now.

This short strangle achieved 75% of it’s profit potential in 40% of the time. I didn’t want to have to wait a further month to reap in the remaining profits, theta decay turns very slow in such cases, so it’s not really worth it. I’d rather open up a new trade with larger theta.

Also, there is an emergency OPEC meeting tomorrow. Odds are that nothing will happen, but you never know.

I plan on opening another CL trade tomorrow after the results of the OPEC meeting and the weekly EIA report are made public.

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