It’s been a minute since we’ve put some delta-neutral credit spreads on, states Sean McLaughlin of AllStarCharts.com.
And while the COBE Volatility Index (VIX) is off its highest levels of the year, there is still plenty of elevated premium in pockets.
The team here at All Star Charts has been monitoring the elevated options premiums in the Consumer Discretionary space. The Consumer Discretionary Select Sector SPDR (XLY) has been persistently hanging around the top of our implied volatility lists for the last couple of months. We talked about it yesterday during the @allstarcharts live Twitter spaces chat.
And I like having a few delta-neutral trades on to provide some portfolio balance against my bullish and bearish directional bets in individual stock names. So $XLY is providing us a good opportunity to collect some income.
Here’s a daily chart to give us some perspective:
The area highlighted in grey should act as upside resistance if the rally off the lows continues. Meanwhile, the recent lows of $136 in May feel like they may hold, at least for a little while. And that’s the bet we’re making.
As we can see here, implied volatility priced into XLY options is near the highest levels it's been all year. So this provides us with good options premiums to sell into:
This sector can move when it wants to, so we’re going to define our risk while selling some premium.
Here’s the Play
I like to sell an $XLY July 130/140/170/180 Iron Condor for an approximately $2.00 net credit. This means we’ll be short equal amounts of 140 puts and 170 calls, and we’re protecting the position with equal amounts of long 130 puts and 180 calls. These long options define our risk and limit the margin requirement to hold the position.
For risk management purposes, if we see XLY break above resistance and close north of $170 per share, that will be on signal to close our trade to limit the risk of any further losses. If, on the other hand, XLY decides to challenge the lows, we’ll lean against the 136 level. Any close below $136 is our other signal to exit. In either scenario, both invalidate my thesis that XLY will be rangebound for the next few weeks and therefore I want out of the position.
Meanwhile, we’ll leave a resting order to close the entire spread down for a profit at a $1.00 debit. This will mean we’ve captured 50% of the maximum possible gain in the trade, without having to hold open risk all the way until July expiration day.
Learn more about Sean at AllStarCharts.com.