Optimized Uptrend: Phillips 66 Options with Downside Protection


Gary Christie


March 18, 2024



Min Read

Energy was the best performing sector last week with a gain of just over 4% followed by Materials and Financials. Phillips 66 (PSX) has been trending higher, posting new record highs.

Using Trading Central Options Insight, we filtered for bullish strategies to ride the uptrend. As there is no overhead resistance level we chose “Significantly Upward” as our level of bullishness. Due to the risk of a significant pullback at record highs, we focused on strategies that limit downside risk, capping losses.

TC Options Insight identified the following preferred strategy, an April 157.50-165 Bull Call Spread.

The “Expected Move Cone” gives us a potential target of$168.55 on the upside which would result in all Trading Central Technical View targets being reached, a high probability setup.

The PSX April 157.50-165 Bull Call Spread. expiring in 32 days is the preferred strategy based on current volatility levels, expected price movement, and a desire to limit downside risk. The Probability of Profit is at44% which is higher than the long call. Closer to 50% POP the better. This strategy uses proper mechanics, focusing on not paying more than 50% of the width of the strikes, in this case $3.75 max debit in order to replicate the same odds as being long 100 shares of PSX.

“What if I am long shares and worried about a decline from record highs?”

For those that are already long 100 or more shares of the stock, quickly changing to “Protecting my existing long position” as a focus will result in bearish strategies to protect long positions of stock.

The preferred long Put of $157.50 is ideal for traders and investors who believe a downtrend in underway and they do not want to sell their shares.

The Bear Put Spread is an ideal hedging strategy for someone who is long 100 shares and very concerned of an imminent decline as the lower $152.50 strike falls within the expected move probability of $147.93 on the downside. In this case, downside insurance only cost $192 dollars if the stock drops to $152.50. A stop loss on 100 shares just below the downside expected move at $147.93 would result in a loss of $1107, more than double the hedging/insurance cost if options were used.

For those that are only slightly concerned of a potential downside move and want to cap losses, the $155 put strategy in the middle offers a low cost $330 per 100 shares, capping your downside risk below $155.

Options Insight was designed to show retail stock traders that have never considered trading options, the benefits of options strategies that replicate being long stock with less downside risk and learn the importance of volatility and expected price movement in the strike price selection process.

The investment ideas presented here are for information only.  They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.

Gary Christie

Head of North American Research
Gary has over 15 years in financial markets. Prior to joining TC, he served as an equity & derivatives specialist with TD Bank and Bank of America. Gary is regularly quoted in Bloomberg News, conducts many education and market outlook webinars for investment institutions all over the world and has been a guest speaker at the New York Traders Expo.
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