A Cap Gains trade where i cannot lose

BY ANDREW GIOVINAZZI

September 10, 2024

Yo Pit Crazies,

Check out what we are doing in Weekly Profit Cycles. Hannah and I just ran an intro class on making your first trade and you will see more of that throughout Option Pit.

The next question is how do you make a trade where you cannot lose? The right set up helps but the idea is to take what is paying. In Cap Gains we have themed stocks that Frank picks that we put trades on. The Energy Sector is a long term long play where we like to trade the bounces but know that the sector is volatile. All that AI takes up a lot of energy.

ExxonMobil Corp (Ticker: XOM) is one of those names that I like because the option premiums can get relatively inexpensive and the name is prone to larger moves. When options only cost $1.25 and the stock moves $3, easier to make money.

XOM 5 Day chart

XOM started around $115 last week and traded back to $115 Monday. The stock went nowhere but I now have a trade where I cannot lose.

How did I do it?

The trade started like this

Cumby’s Gas Station Trade- Daily Theta Backspread with Defense Upside Kicker

The best way to set up a trade that pays for itself is to have two sides to the trade.

You wait for one of the sides to make 100%, and when it does, you can ride the rest of your trade (the other side) for free.

Here’s what I did on XOM.

Here’s what I saw: XOM options were cheap

Here’s what I thought: XOM was likely going nowhere over the next week, but I knew I could build a trade win

Here’s what I did: I build two sides to my trade … one that would win if X and one that would win if Y. Side X won first, I closed for XX%. I’m still riding side Y ….

If you want to build Two-Way trades with me every single week, where we construct trades that “cannot lose”, check out my Two-Way Trade strategy here, I use the SPY and VIX

BTO 3 XOM Oct18 120c

STO 3 XOM Sep20 120c call calendars for 1.25

BTO XOM Oct18 110 p 1.28 with total debit of $5.03 for 1 spread. I think of the whole trade as 1 spread with separate legs.

The dollar balance was $375 to $128, call calendars to puts.

We placed the trade Tuesday and it had about $5.00 per day in theta at the outset so there was very little decay early on. Note below that XOM dropped for 3 straight days.

The dollar balance on Friday was $256 to $245. Note overall the puts gained in value and the call calendars shrunk to .85 each.

My Friday note to subscribers was to close the XOM Sep20 120 calls for .15 or better and I closed them for .13. That cost .42 per basic spread but the net effect was to get the position slightly longer deltas.

Note the orange Nov Sigma line below that the October options were going up in value and near keeping up with the Sep (red line). The Oct Vegas are much higher so the value of my Oct position was growing relative to Sep. If XOM kept falling the implied volatility would rise more so it would be easy to close the whole position for a gain.

XOM 5 Day Chart with Sigmas for Oct in red and Nov in orange

But XOM did not fall, it flew so the newly “exposed” 3 XOM Oct120 call jumped to $1.90 and I sold them at $1.85 with the alert out to my subscribers.

The dollar balance now was -$5.55 close on the calls with a $5.45 entry cost leaving me with a .10 credit. I own the XOM Oct18 110 puts for .10 credit until expiration currently trading what I paid for them.

There are many techniques here in this trade that you can learn that require Greeks, gamma scalping, calendar pricing and trading, position and risk management, realized volatility and implied volatility trading, with basic calls and puts.

Check out what we are doing in Weekly Profit Cycles. I cover all of these topics in all of my products, especially in Weekly Profit Cycles where I look at SPY and VIX with basic call, put and spread trading.

To Your Trading Success,,