News

Trade of the Week: Long straddle on XJO

June 29, 2022

Trade of the Week: Long straddle on XJO

The XJO index is sitting on top of a key pivot point around 6750 after trading as low as 6407 and as high as 7288 since the 31st of May 2022. With implied volatility falling from 25% to 18.5% recently, this could be a good time to enter a long volatility position in order to benefit from a potential large swing around the current pivot level. If the market continues to display volatile price action (as it has been experiencing throughout June 2022) then we could see price action rise to 7000 or fall to 6400.

The XJO index is sitting on top of a key pivot point around 6750 after trading as low as 6407 and as high as 7288 since the 31st of May 2022. With implied volatility falling from 25% to 18.5% recently, this could be a good time to enter a long volatility position in order to benefit from a potential large swing around the current pivot level. If the market continues to display volatile price action (as it has been experiencing throughout June 2022) then we could see price action rise to 7000 or fall to 6400.

Source: Implied Volatility

Source: Implied Volatility

The long straddle will have at-the-money strikes of 6775 and an expiry date on the 21st of July 2022. An expiry date three weeks out will allow for the European index option to be profitable if the market moves quickly towards 6400 or 7000.

Source: Implied Volatility

With a long straddle, a significant move on either side of the 6775 level will result in a profit; and a sideways market or a small directional move will result in a loss, ceteris paribus. Seeing a straddle is constructed with two long options, the position will increase in value when implied volatility rises. However, the two long options will both experience time decay simultaneously, making this position theta (time) negative. This is why we are hoping for a quick and significant move in either direction to boost the intrinsic value of one of the legs and potentially boost implied volatility levels, further increasing the value of the position.

On the upside, a good exit point could be at resistance around 7000. On the downside, a good exit level could be around the 6450 support level. If implied volatility quickly rises towards 25% and makes this position profitable, it might be worth considering closing the position to lock in the profits.

Source: Implied Volatility

The ideal holding period would be within one week. However, consider allowing one and a half weeks in case the market trades sideways for a few days.

For further information on using the Implied Volatility platform you can follow this link, here.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only. 

Past performance is not a reliable indicator of future performance. 

The opinions expressed in this article are our personal views. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. From 5 October 2021, under Design and Distribution Obligations, anyone opening a trading account will be required to meet the Target Market Determination criteria of Phillip Capital and subject to an assessment the results of which will determine your eligibility for a trading account, for further information please see here.

If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

Any advice provided by *Reach including on its website and by its representatives is general advice only and does not consider your personal objectives, financial situation or needs, and you should consider whether it’s appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. Please click here https://reachmarkets.com.au/general-advice-warning/ to read our full general advice warning.


General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

Morning Market Report

A technical view of the Australian and key international markets

Leave a comment