When $XLE was over a 72.5 RSI intra-day Tuesday I sold ten at-the-money $94 strike calls for $720 and bought 10 $96 calls for $92.45 to hedge as it reversed around $94.26. The close ended up forming a gravestone doji. I was selling the call options based on the risk/reward and price history of price reversing back under the 70 RSI historically in the short term when $XLE closed above it. The odds as far as winning percent was in my favor along with the fact that even if it continued higher the odds were that it could only stretch as far as the time premium that I sold. The low of the reversal day ending up being the resistance for the next two trading days.
I only write short options with a hedge in place to avoid any huge losses from random risk events. I do not sell naked options short I always use a credit spread to capture option premium.
I bought the short call side back to cover Thursday afternoon with only $162 in premium left and the RSI falling back under 67 before non-farm payrolls Friday since now the risk/reward shifted back against me and it was possible for it to rally back and take my profits with the delta expansion on the last day of expiration. I bought back the $94 calls but was unable to sell the $96 calls that I used as a hedge because they had zero volume based on the probabilities of being worth anything. Volume is a major concern with trading options versus stocks, there are times when you can not get out of an option becasue there are zero buyers, this danger exists primarily with deep in-the money or deep-out-of-the-money options. I find the best odds for success in selling option premium in indexes and sector ETFs when RSI extremes of 70 or 30 are being met, they are also mostly have highly liquid options in strike prices that are close to the current price. I find at-the-money a better bet at these levels than the out-of-the-money that have us taking big risks for small premiums. The odds are that the $94 call still expires worthless tomorrow but I am not risking it for such a small reward and $94 resistance still so close to being hit.
This trade was inside my smallest trading account and ended up being a near 1% return in that account.
