Jermal Chandler Sells a $417 Oil Strangle and Walks the Risk

CL

The speaker sells a strangle on the August cycle, targeting a profit from time decay and volatility. The trade is based on the expectation that oil will remain within the 75-95 range, with the 21-day cycle being preferred over longer cycles. The trade involves selling a 75 put and a 95 call, with a total premium of $4.17. The speaker acknowledges the risk of a loss if oil moves outside the range, but believes the trade is viable given the current market conditions.

MCL

The speaker proposes selling a 66 fall in MCL, leveraging the current skew and implied volatility. The trade is based on the assumption that oil will remain within the 75-95 range, allowing for profit from the range-bound movement. The speaker also emphasizes the importance of liquidity and risk-reward ratio, preferring MCL over CL due to its smaller contract size and lower premium cost.

Volatility and Time Decay in Oil Trading

The speaker explains that volatility declines most quickly in the 45-day cycle, and they usually try to close positions or roll out in 21 days. As you get closer to expiration, gamma and delta increase, leading to more rapid price movements. This is why the 21-day cycle is preferred over longer cycles like 58 days. The speaker also notes that oil tends to crash up, leading to skew to the upside.

Volatility and Skew in Oil Trading

The speaker highlights the importance of volatility and skew in oil trading, noting that implied volatility is currently in the 50s, with a skew higher on the upside. This skew indicates potential for higher volatility in the upside direction, which can be leveraged by selling a 66 fall in a 27-day cycle. The skew is presented as an indicator for market expectations and risk management.

What is the recommended time frame for the trade?

The speaker recommends a time frame of 15 days for the trade, as they believe the trade should not be held longer than that.

TakeawayThe trade should be held for a maximum of 15 days.

What is the risk-reward ratio for trading MCL versus CL?

The speaker explains that MCL offers a better risk-reward ratio compared to CL. MCL has a smaller contract size, making it more digestible and less expensive, with a premium cost of $400 versus $9,000 for CL. This makes MCL more suitable for smaller books and easier risk management.

TakeawayTraders should consider contract size and premium cost when evaluating risk-reward ratios for oil trading.