XLE Time Decay Spread Look Back Trade

XLE – 6/16/2016

XLE was in a downtrend still trading above its 50 day moving average which could cause a bounce up but I felt there was strong resistance at $70.00 with XLE trading at $66.55. I decided to place a spread trade to take advantage of what I felt was a range bound security. With this trade I wanted to take advantage of time decay. I purchased five contracts of the July week 2 $70 Call for $0.32 and sold five contracts of the June week 4 $68 call against them for $0.35. My best profit on this trade would be if XLE closed at or just below $68.00 at the time the June week 4 option expired. My risk on this trade was $1,015.00. Profit would be highly dependent on the stocks movement and volatility.

By 6/22 this traded had moved against me with XLE trading at $68.18. I was sitting on a $130.00 loss if I closed immediately but I felt my $70 resistance would hold. Another thing I was looking at is with the Britain Euro vote about to happen is if they decided to leave the Euro this would be a hedge trade for me against the rest of my portfolio. On 6/23 XLE moved up to $68.56 increasing my unrealized loss but for the reasons above I held. On 6/24 with the entire market down sharply because Britain voted to leave the Euro XLE had dropped to $66.24. Now my problem was I did not want XLE to drop to far away from my long $70.00 or I could still lose money.

My June week 4 expired worthless but there was not much left on my $70 Calls because XLE had dropped to $65.00. I had some time left on my Calls so I decided to wait it out believing the market was over the panic sell off and would bounce back up. By 6/29 XLE had jumped back up to $67.27 and I decided to close the position before my Calls lost any more time value. In the end I made $55.50 or 5.47% on a 13 day trade. Annualized it would have been over 153%. As you can see one of the advantages of options is that sometime even if things do not go the way you think you can still make money.

NOTE: The goal of this type of trade is to get into it as close to break even as you can.

Date

Sym

Exp.

Strike

Price

Contracts

Type

Cost

Balance

06/16/16

XLE

BTO

7WK2

70

-$0.32

5

Call

-$168.34

-$168.34

06/16/16

XLE

STO

6WK4

68

$0.35

5

Call

$166.66

-$1.68

06/28/16

XLE

STC

7WK2

70

$0.14

5

Call

$57.18

$55.50

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