We published the following bonus trade for our members back on May 2:
Buy to open XLE June 70 put
Sell to open XLE June 72 put
Sell to open XLE June 90 call
Buy to open XLE June 92 call
for a net credit of $0.47 or better.
Anyone following this trade should have already exited - remember, we want to be out of any front month short options by Monday of expiration week at the latest. Negative gamma risk during expiration week is ever a clear and present danger. If you’re still in the trade, you would exit here by buying back the XLE June 90/92 call spread for a net debit of about $0.25.
Analysis: The original rationale for this trade was that the big rally in energy through March and April seemed to be stalling, so we wanted to get neutral and sell some premium. We were right (for about 2 weeks), but then XLE spiked up in mid-May to a high of 91.42, which induced raw panic among a couple people who were following this trade.
Our answer then was the same as always: play defense first. Figure out how much capital you’re prepared to lose on the trade in question, and then size your position accordingly. That way, rather than running away every time an underlying shows a little spunk, you can sit tight and let the probabilities work themselves out. If the trade hits your maximum loss point, so be it. Sometimes those losses will occur, and sometimes, as in this case, the underlying will practically bounce off your short strike and revert to profitability (see chart).
If you waited to exit until today (and hurry up, better to get out ahead of the inventory report at 10:30), you’re still looking at a return of 14.37% on capital risked.