On 11/22/2023, there was a spike in crude oil (/CL) volatility that I thought provided an entry opportunity for doing a long-dated low-delta short strangle in /CL.
I entered this trade on Wed 11/22:
Instrument: /CL
Expiration Date: Feb 14, 2024 (84DTE)
Short Put: sold 56.5 strike for 0.61 credits (x1000 = $610)
Short Call: sold 101.5 strike for 0.38 credits. (x1000 = $380).
These strikes were around .07 delta.
Total Credits received: 0.99 (x1000 = $990)
Initial Implied Volatility Rank (IVR): 54.80
Initial Implied Volatility (IV): 39.0%
CME CVOL: 42.84
IBKR Initial Margin Requirement: $6400
IBKR Maintenance Margin Requirement: $4800
Exit strategy: take profit at 50% or close trade at 21DTE.
Stop loss: exit position at a 250% loss.
Crude oil futures has an x1000 multiplier. Each handle/point in /CL has a notional value of $1000.
Current snapshot of the trade on the Tastytrade platform:
The position can be bought-to-close (BTC) for 0.62 (+38% unrealized PnL).
Volatility collapsed on Thursday after the OPEC+ meeting. IVR currently around 43.3.
Nothing to do here other than to wait for the position to hit the 50% profit target.
On Monday, I created a stop-limit order to take me out of this position if the price went above 0.74 to close. I saw no reason to allow a profitable trade go bad.
The order triggered this morning to close the trade for 0.75 to lock in a 24.2% profit (+$240).
You will want to use the same pricing units as the underlying and not the notional value. Example, if you sold a /CL strangle for 2.37, you will want to set the stop loss to trigger when the price hits 4.74 (2x the initial credit received).
You can also attach a profit taking order to close the trade for a 50% profit if price hits 1.18.
I do some analysis on the Tastytrade platform, but actually execute my trades on my Interactive Brokers account on their mobile platform. On IBKR, when the market is closed, you won’t get accurate option pricing information.
I would recommend starting with the underlying MCL (micro crude oil futures). These are 1/10 the size of CL. You wont have as much at risk when learning/playing opening and closing these short strangles.
When opening the order, use a “Limit” order instead of a “Market” order. Market order will fill at the Bid price. Using a limit order, you can squeeze out a few more dollars by trying to get a fill at the Mid price.
I also recommend not posting screenshots with your account# on them to the Internet. Edit the image and blur out the number in order to not expose any personal information to unwanted parties.
Great thanks heaps. You have been very helpful. The account is just a dummy one I use for training but thanks for pointing this out. With The stop loss section that looks like this:
For a short position the stop loss order price will be greater in magnitude (either more negative or more positive).
One confusing aspect about opening a short position in IBKR is that the platform defaults to a “Buy” order. For a short position, you’re buying for a negative price (which makes it a credit trade). When initially opening the position the platform will say something like “-2.37 credit” in the price area.
If I want to create a stop loss order for 2x credit received, the stop loss price would be “-2.37 x 2 = -4.74”. So, in this situation, you would need the negative sign “-” on the stop price.
When this stop loss triggers, I’m giving back the initial 2.37 received and an additional 2.37 for a 100% loss on the trade.
If when opening the short position you buy to open for “-2.37 credits”, a stop loss for 1x credit recevied would be: “-2.37 x 1 = -2.37”. If when the stop loss triggers, you’ll give back the credit you recevied for a 0% loss on the trade.
All this is backwards, non-intuitive, and confusing. So, asking questions is the right thing to do.
So With the following, is the stop loss a (-) ? I think you have answered the question above as I was typing lol.
Can you please fill in the blanks below on this example so I can keep it real on my first trade next week.
Credit premium received: -$2
What is the following:
1 x credit stop loss = $
2 x credit stop loss = $
Half credit stop loss = $
Is there a way I can engage with you off here. I’ve learnt heaps from you. Or are you happy to engage here?
In one of your posts you posted a Tom King YouTube learnings I think, I really like his style of investing. What do you think of him? I think his great. Teaches really well.
I REALLY Appreciate everything you have said and explained for me, thanks.
I’m happy to publicly engage here. Any questions you ask may be of benefit to others lurking on this thread. And others could chime in with other helpful suggestions.
In the order screenshot you attached, first thing to do is change the Order Type from “Market” to “Limit”. This will give you a little more clarity on how much credit you will be collecting when opening the trade.
This is kind of a confusing question to answer mainly because you’re asking about a “Half credit stop loss”. I guess it depends on how you define “stop loss”.
It’s important for you to understand thoroughly and internalize things for yourself. That way, you’ll know with certainty how much risk you have on the table.
Let’s say you sell a widget for $100 and have the intention of buying back later at a lower price for a profit. But if the price of the widget goes up, you want to cut your losses when it hits a certain stop loss price. You say to yourself, if the price goes up to $200, I need to buy back that widget for $200 and take my $100 loss. In your mind is this a “1x credit received” stop loss or a “2x credit received”?
What’s your intention on how much you are willing to risk with a stop loss of “half the credit received” with a short trade that gave you $100 in initial credit?
Yeah, his videos seem pretty straightforward, honest, and fully open. He’s known for the “112” short trade setup. I recommend watching his tutorial videos on that trade setup.
There are a lot of free resources on the Internet. But I will tell you “selling options on futures” does have a huge learning curve. Learning about options themselves is difficult: understanding delta, gamma, theta, vega. And then learning about Futures contracts: pricing, tick sizes, notional sizes, expiration, term structure is another huge hurdle. It’s a long road.
Hi, as per the example screen shot I guess just the example of $2 premium received and what the stop loss for 1 x credit stop loss would be. Would it be with the (-) in front of it.
Would be great for Tom to do a tutorial video on exactly what we are talking about and how to place stop loss on futures using the premium gained instead of talking about 2 x credit stop loss. That would be a great video. Explaining it like you just did.
How are you @exsanguinator ? Just thought I’d share with you my strangle I put on CL last night. Could you look at my stop loss and see if I got it right? I’m wanting roughly 2 x credit SL. Appreciate your feed back.
Instrument: /CL
Expiration Date: March 15, 2024 (86DTE)
Short Put: sold 53.5 strike for 0.42 credits (x1000 = $420)
Short Call: sold 99 strike for 0.27 credits. (x1000 = $270).
The strikes were around .06 - .07 delta.
Total Credits received: 0.69 (x1000 = $690)
Exit strategy: take profit at 50% or close trade at 21DTE.
Stop loss: exit position at around 2 x credit loss.
Placed stop-loss @: -1.40
The stop loss I placed on IB is -1.40 what are your thoughts on that, was I reading your example posts correct? Thanks in advance.
With -.69 credit received and a stop loss of -1.40, you’ll take about a 100% loss on the position if the stop triggers. That is, you’ll give back the initial .69 received and an additional .71 credits.
If that’s your intention, then this looks correct. Congrats.
