Let’s step into the wayback machine for an update. Back in July, when the oil energy etf XLE was around $65 we took a look at it from the long side and detailed a defined risk bullish trade that could play out into year end. We financed an upside call in December by selling one in August. Here was the trade and some rationale on the structure, from July 18th:
I am a bit more skeptical though, definitely near term, and I might look to do a call calendar, selling an out of the money shorter dated call and buying a longer dated out of the money call. Risking less, but buying some more time and allowing for a couple of ways to win with timing:
XLE ($64.90) Buy the Aug/ Dec 68 call calendar for 1.15
- Sell 1 Aug 68 call at 17 cents
- Buy 1 Dec 68 call for 1.32
The key phrase there was “a couple of ways to win with timing” and the reason we went with a calendar. We thought XLE had a good chance of getting going in 2017, but were unsure of the near term prospects. That proved to be a good gut instinct as the etf saw lower lows into August, the Aug calls expired worthless and the position was simply Dec calls. We circled back on Sept 7th when the etf had rebounded a bit to our entry price, but still, the overall trade was a loser with those calls worth just .75, vs the 1.15 cost basis. Here was the adjustment at the time:
With this trade still looking out to December I think it makes sense to at least give the trade a chance over the next month by turning the Dec calls into a vertical:
Action: vs 1 Dec 68 call, sell to open 1 Dec 71 call at .25
Rationale – This takes off some of the premium at risk into December. It caps gains fairly aggressively, but given that the Dec 68 call is still out of the money, doing nothing isn’t really an option.
New Position: XLE ($65) Long Dec 68 / 71 call spread for 90 cents
This goes back to the “optionality” of the calendar versus a straight vertical call spread as that allowed us to stick around in the trade rather than simply taking a loss on it. That helped because XLE is now higher, and the Dec call spread is in the money and profitable. With the etf now 69.40 the Dec 68/71 call spread is worth about 1.60, versus the .90 cost basis. In other words we were able to turn a .40 loss on the initial trade, into a .70 gain after the roll.
As far as trade management now, the trade is worth just above where the stock is trading intrinsicaly. So if the stock closed here on Dec expiration it would lose .20. Not a huge deal, the bigger risk (or potential reward) on the trade is if the stock goes higher or lower from here. A close below 68 on Dec expiration and the entire trade is worth zero, a close above 71 and it’s worth $3. So fairly binary at this point. Therefore it makes sense to simply close at a profit for those happy to get some profits out of this trade, and stick around for those looking to make up to $3 on risk that is still only .90 overall.