In the last month and change we’ve focused some short delta ideas that have some similar themes (e.g. increased chances of recession Europe post Brexit). We expressed those views in 3 etfs in particular that are down today and I wanted to check in with those and talk trade management. The first trade was immediately after the Brexit vote in XOP, the S&P Oil & Gas, E&P etf. Here was the trade idea from June 24th:
*XOP (34.70) Buy the September 34/28 put spread for 1.70
- Buy 1 Sept 34 put for 2.30
- Sell 1 Sept 28 put at .60
Today, XOP is 32.80 this trade is worth 2.05. So it’s working on deltas with the ETF lower than entry, but it has lost some profits with decay over time. The break even on the trade is 32.30, so decay will continue as long as the etf is above 32.30. Below that level this trade is in a very good spot. So as far as trade management, while it’s profitable now we’ll keep a short leash on it if the market continues to go sideways or creeps back higher. If it continues lower we can be patient as it has the potential to be worth up to 4.00 if XOP is below 28 on September expiration.
The next trade to look at is focused on Europe itself. On July 14th we detailed a short delta trade idea in FEZ, the EuroStoxx 50 etf. Here was the trade:
*Trade: FEZ ($32.05) Buy Nov 32 / 26 put spread for 1.50
- Buy to open 1 Nov 32 put for 1.75
- Sell to open 1 Nov 26 put at 25 cents
FEZ is slightly higher (basically unchanged) than where we entered this trade, and today with it at 32.15 the put spread we paid 1.50 in is now worth about 1.25. Going sideways is not great for this trade as it has and will continue to decay as long as it’s above its breakeven of 30.50. But since this is November expiration is has plenty of time. Currently, the etf sits right on its 50 day moving average. A failure here and it could be at or below our breakeven fairly quickly. A successful hold and we’ll have to start thinking about reducing premium risk, by rolling the short put higher or closing altogether for a small loss.
The most recent trade idea focused specifically on how the strong dollar would affect oil prices, and combined with any decline in demand could affect high yield corporate bonds. The HYG, the iShares High Yield Corp bond etf, had rebounded sharply alongside oil prices throughout the Spring, and with oil under pressure recently, HYG has shown some very good relative strength. It was our view that if oil were to continue lower, we could see these two become correlated once again. Here was the trade from July 22nd:
*HYG ($86.08) Buy Aug / Oct 84 Put Calendar for $1.20
- Sell to open 1 Aug 84 put at 25 cents
- Buy to open 1 Oct 84 put for $1.45
With HYG 84.70 today, this trade is worth about 1.25. That’s a little disappointing with the etf lower, but this is a calendar with an expiring short put in August, just a few weeks away (the Aug puts sold at .25 are higher at around .40). So the trade is in a good spot as long as this doesn’t suddenly tank on us and gap lower over the next 2 weeks. So ideally HYG drifts lower, towards 84, and we can then roll the short August put out to September or October, and lower. So nothing to do here yet but we will have to make some decisions on what to do with that expiring August put at some point soon.