MORE FREE PETROL?

Courtesy of XOP

With crude oil coming down almost 50% from its peak a year ago, gasoline prices still stayed at MYR2.02 (USD0.45)/ litre. As low as it sounds, gasoline in Malaysia is subsidised by the government. Whether you call it fortunate or unfortunate, we pay practically the same when crude oil was at $122 or at $74. But it still takes off $100+ off my pocket every month not to say all other things you buy probably went up 20-30% due to inflation.

To ease the burden, we made a trade on XOM around 3 weeks ago and we got at least $50-$60 in profits [max profit is $100], if you had closed the trade. [See our last Quick Bites]. It’s around 10 more days to expiry of 10 March. If you consider profits like this, it’s really FREE PETROL and I thought, why not put in another one to cover March’s petrol expenses.

XOP ETF

We picked an ETF this round, XOP which is oil and gas explorer ETF, which comprise those billion dollar ultra rich companies which made big bucks over the last 2 years from the high oil prices. You know, the Exxon, Conoco, OXY, Marathon and the lot…

As crude oil has came down significantly, so did the price of XOP. Nevertheless, XOP is still riding along this support line over the past 1 year plus. Overall long term trend is still up.

As it hit this support line and bounced up, it may hold a bit on the downside for now. As for the upside, we may not go up so fast as the overall crude prices is holding down at support around $72 and resistance at around $80-82. So this may bounce between for some time. Global economic wise, we see slow growth or no growth for most countries and China seems going up but not as fast as expected, when global economy is down, where is the demand?

So with this, we are going to do something neutral this time.

Trade Structure…

Strategy is the good old Iron Condor, a neutral play, where we get in a trade and let it play out in time within a trading price range.

• DTE 30 days to 45 days optimum. As the next monthly expiry is 21 April, 52 days, it is still ok to take this one.

• Sell a Bear Call Spread $3 width at Delta 20

• Sell a Bull Put Spread $3 width at Delta 20

• We got ours filled at $1.05, with a risk of 2 for 1, max loss is $195 per lot. As price of XOP dropped $2 yesterday, you may need to adjust the strikes probably down to -118P/+115P and -148C/+151C based on todays closing price, at $1.07/$1.08.

  

Why structure this way?

We want to trade along a band and as we said earlier, oil is not going to drop further nor does it seem to have any spike up in the next weeks. But watch for the Fed rate hike announcement coming 22 March, if your trade is still open.

What if it moves out of the range??? 😭

Fret not, this is a defined risk trade, you max loss is covered on entry! if it breaches any of the upside or downside, you would probably start to see losses. As our range is quite wide with each side with 80% probability of not breaching, it’s considered a safe trade. Anyway, in trading, nothing has 100% certainty.

If it breaches on any one side, review the following.

• How much time do you have in the trade, the more time you have, the higher possibility that it may go back the other way;

• Look at the price action, if the price breach down, is it at oversold position and if it breaches up, is it at overbought. Relook at first point above, if you have time for it to reverse;

• If you have less time to expiry, see if it is possible to extend or roll the trade to buy more time for it to reverse;

• You may also take profits on either side which is not breached, if little extrinsic value is left, leaving behind the tested side to manage;

• Rolling down or up will probably not help much as the premium you get from rolling the untested side, will not be much and will also decrease the profit price range. As it is a defined risk trade, I would only manage through extending time rather.

When to execute?

Anytime, as long as you can get a good risk to reward of 2 to 1 and the trade range is reasonable around the support and resistance levels.

Example on Trade Platform

I just picked these strikes as an example as I have existing position and could not overlap some opposing strikes. So you just pick Delta 20 on each side for the short strikes, should work fine.

Watch Traders Talk…

We covered the this strategy on Traders Talk last Tuesday 28 Feb 23. Watch the replay here (36.00).

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