Today's downwards market with #VIX around 30 represented very many opportunities so I just picked one that appears pretty safe: #FXI, which is an ETF representing the Chinese large-cap stocks.
Looking at the 20 year chart, which includes some really tough periods like the #GFC (#globalfinancialcrises), we don't need much experience to see that today's price at $36.71 is on the lower end of it's range. I drew a line at just over $36 for easy read of the chart.
So what's the opportunity here for an option trader?
Here is a snippet of the option chain for March 18 expiration (28 days):
The orange shaded area shows the 1 SD (standard deviation) and normally I would go outside of the 1 SD but I am comfortable taking more risk with this particular ETF and go with the $36 put strike (left side of the strikes), which trades between $0.81 and $0.88.
The stats:
Credit: $0.84
Capital required (bp): $667
Expiry: 18 March
Annualised profit potential: 164%
There is also a rationale to sell the $35 put instead as for $0.30 credit less you reduce your risk by $1 but it would still require $565 capital. However, it's certainly a safer deal than the $36 put.
Also worth noting that sometimes it's a good idea to sell the call side too (e.g. $39 strike) but I personally prefer to play one side as you can close deals faster.
Let's see how this one would play out.
Rolled to Mar $33p/32c for $0.79 debit.
Total credit: $-0.13.
Logic: By rolling up my call side from $30 to $32 I am reducing my risk by $2 for $0.79.
If the price stays around this level then in about 30 days I can roll to April and hopefully move my call strike up again.
End game: convert my inverted strangle to a normal strangle and eventually exit the trade with a profit.
Rolled to Feb $33p/30c for $0.21 credit.
Total credit: $0.66.
This trade continues to cause headaches.
Rolled to Jan $33p/29c for $1.76 debit.
Total credit: $0.45.
Saving this position will take a long time.
Fortunately it doesn't require much capital.
Rolled down the call side to $24 for $0.38 credit.
Total credit: $2.21.
Rolled to Dec $33 / 28 for $0.41 debit.
This deal has not been kind to me at all, but at some stage it must bounce back.
Total credit: $1.83.
Rolled out to Oct $34/33 for $0.22 credit.
Total credit: $2.24.
This trade currently consumes $495 buying power.
I suppose if I collect about $22 every month than the return is not bad at all.
This dog has been challenging but I know that at some stage it will bounce back.
Rolled to Sep $34/33 inverted strangle for $0.25 credit.
Total credit: $2.02
At some point this trade looked promising but in recent days the price dropped again so I had to roll to Aug $34 / 34 straddle for $0.46 credit.
Total credit: $1.77
It was time to roll this position to July $34 and I also sold a $33 call.
It cost $0.10 but my put side is $1 closer to the current price.
Total credit: $1.31
The non-sense covid related lockdown continues to keep the Chinese market down so I have no other option but to roll to June $35 put.
I have a feeling that once the lockdowns are lifted than this ETF is going to jump so I am not brave enough to sell a call option against it.
Total credit: $1.41
Another interesting point about this trade is that even though I am heavily in the money (ITM - meaning that I have a $35 put but the price is under $35), it still gave me $30. If I have to do this for the rest of my life then I am happy with it as the capital in this trade is just over $600.
The Chinese market continues to work against me so I had to roll this position to May by buying back the April $35 put for $3.08 (generating a paper loss of $1.47) and sell the May $35 put for $3.48.
The new net credit for this position is $1.11 so the breakeven point is at $34.89.
Eventually the price will move high enough for me to close this position.
Given the unfavourable market conditions I decided to roll this position to April and roll it down from $36 to $35.
What does this mean?
When the underlying moves against us then we have to adjust our position to avoid heavy losses.
In this instance we could roll to April with the same $36 strike, which would give us an extra $0.40 credit so the total credit would be 0.84 + 0.40 = $1.24. Therefore our breakeven (BE) would be 36 - 1.24 = $34.76.
If we rolled to $35 then the trade would cost us $0.13, which is not ideal as we want to make money, not loose money. However, given the current market conditions I would be happy to give up $0.13 from the $0.84 I collected a couple of weeks ago. It would mean that our total credit would reduce to 0.84 - 0.13 = $0.69, while our breakeven point would move down to 35 - 0.69 = $34.31. Essentially $0.55 lower than if we rolled to April $36.
What we could also do in these situations is that we could sell a call option to lower the breakeven point further, however the price can quickly rebound and hurt us on the call side.