We entered a trade last week on the expectation that if odds continued to strengthen that the U.S. will not attack Syria, the added risk premium would be priced out of longer dated options on oil futures contracts. We looked at a November short vertical call spread as one way to trade this expectation.
Since then, November WTI crude has fallen to $104.71, which benefited the short call spread because of the bearish price bias in the trade. But just as significant was the reaction in options markets.
The darker blue line shows the implied volatility for November CL options on September 12th, with the same volatility skew a few sessions later in light blue. The bid in out of the money call options dropped almost a full volatility point in some cases, and that means we can exit the options spread having collected most of the possible profit in a much faster time frame than would have been possible if we were relying on price changes alone.
Trades: BTC LOX3 November 114 calls at $0.28 and STC LOX3 November 116 calls at $0.17.
The trade collected $0.30 to open and costs $0.11s to exit, for a return of 11% on capital risked in less than a week.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Jared can be followed on Twitter at twitter.com/CondorOptions
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV