ETF NAME – SPDR S&P Oil & Gas Explor & Prodtn ETF
TICKER – XOP
MY OPINION (JUST MY THOUGHTS, NOT ADVICE) – I believe that XOP is going to pullback.
STRATEGY USED – Sold an out of the money call spread.
How to Short A Stock – Explained
When someone says they are short a stock, they mean that they expect it to go down. In the case of XOP, if I wanted to short it, I would put in an order to short sell it. I don’t own any shares, so the transaction would look this below.
XOP is trading at 42.97, so to short it I would be collecting my max profit of 4297, for 100 shares. If XOP goes to zero (extremely unlikely) that is the most I would collect. Let’s say it goes down to a more reasonable 40, and I wanted to lock in my profits. Well I already borrowed 100 shares at 42.97, now I have to pay my broker (who is Tastyworks) back. So I would buy 100 shares, at 40, and then I wouldn’t be short 100 shares anymore.
Buying 100 shares at 40, costs 4000, so the difference of the price I shorted at, and the price I covered my short at, would be the amount collected, which in this case is 297. (42.97 – 40 = 2.97 per share.)
But if my assumption was wrong, and XOP goes up, then I have to buy the shares back at a higher price than I shorted them at, and I will show a loss. Worse, there is no upper limit to a stocks price, so my risk is unlimited.
How to Short Stock With Options To Limit Your Risk
So what I like to do is sell a call spread instead. To sell a call spread you sell call option, and at the same time buy a higher strike option. Looking at the screen shot from my Tastyworks account, you can see I sold the 44 calls, and bought the 47 calls. I did this 2x, as you can see S2 = sell 2, and B2 = buy 2.
I collected 102 (51 X 2) which is my max profit. If XOP is less than 44 at expiration, which in this case is Oct 19,2018, I will keep all of my premium. My max loss is 498, which is what I will have to pay if XOP is above 47 at expiration. The probability of profit, or POP as it is called, is in the lower left corner, and is equal to 71%
Selling spreads is a great way for a trader with a smaller account to turn big profits while limiting their risk and preserving capital. Anybody can learn to trade options, and the best way to do so in my opinion is to sign up for a Tastyworks account.
You can open an account with no minimum deposit, which will get you access to the extensive Tastyworks content. If you have only 2,000 you can get what is called a margin account, and will be able to trade options.
The chart below shows that XOP is above R1 at 42.86, and resistance at R2 is 43,84. I don’t expect it to go above R2, and in fact my opinion is that it will fall, but that is just my opinion. I am not a financial adviser.
The RSI for XOP is turning downward. At this time XOP is neither oversold nor overbought.
MACD & Stochastic
The MACD actually shows an uptrend, while the Stochastic shows a sell signal. I use the Stochastic as an entry point to buy and sell, since I am selling options, and using time decay which is on my side. If you are just buying and selling shares, I don’t recommend using the stochastic as your lead indicator.