(mostly) Riskless Short Strangle?

AngryErik

Junior member
13 0
Imagine you have a short strangle... say +/- 2 strikes in either direction... say the stock is trading at $15, you have a short call at $13 and a long call at $17. Net premiums are $2.2 for each direction, which means that assuming you are within your strikes, you end up with a raw profit of $0.4 per share.

Then I got to thinking about hedging. Well.. sort of hedging.

Place a stop limit buy for $17, and a stop limit sell for $13, for however many stocks you have options for (1 strangle = 100 shares). Another possibility for highly volitile stocks (whose IV on options allows for greater premiums), is to put your stop limits further OTM so that you risk a bit more profit for a better chance to avoid filling an order that you didn't need to fill.

The short strangle loses money when a stock goes outside of your strikes, because you'll either buy stocks at way more than they're worth, or sell them for way less than they're worth. But, if you have a GTC order protecting you in either direction, trends in either direction become easy to ignore - you short or long the stock as soon the price breaks into unprofitable territory and you ultimately buy/sell the stock for what you would have in the short strangle.

If either order gets filled, place a GTC sell/buy order to cover at your strike in case the stock rebounds and your strangle becomes profitable again.

The only noticable risk I can see is if it's whipsawing in that range a lot, and you eat up your profits with commissions. Well, that and massive drops that miss your stop.

Thoughts?
 

mark brown

Junior member
13 0
your idea sounds good what about

selling current month out of the money calls and puts - legging into them and then defending as necessary one side or the other. buying back losses and selling more premium stacked up. let's assume you had deep pockets this will work. at worst case you get long or short the actual for a few days and then sort it all out.

mark

Imagine you have a short strangle... say +/- 2 strikes in either direction... say the stock is trading at $15, you have a short call at $13 and a long call at $17. Net premiums are $2.2 for each direction, which means that assuming you are within your strikes, you end up with a raw profit of $0.4 per share.

Then I got to thinking about hedging. Well.. sort of hedging.

Place a stop limit buy for $17, and a stop limit sell for $13, for however many stocks you have options for (1 strangle = 100 shares). Another possibility for highly volitile stocks (whose IV on options allows for greater premiums), is to put your stop limits further OTM so that you risk a bit more profit for a better chance to avoid filling an order that you didn't need to fill.

The short strangle loses money when a stock goes outside of your strikes, because you'll either buy stocks at way more than they're worth, or sell them for way less than they're worth. But, if you have a GTC order protecting you in either direction, trends in either direction become easy to ignore - you short or long the stock as soon the price breaks into unprofitable territory and you ultimately buy/sell the stock for what you would have in the short strangle.

If either order gets filled, place a GTC sell/buy order to cover at your strike in case the stock rebounds and your strangle becomes profitable again.

The only noticable risk I can see is if it's whipsawing in that range a lot, and you eat up your profits with commissions. Well, that and massive drops that miss your stop.

Thoughts?
 

Martinghoul

Senior member
2,690 276
The only noticable risk I can see is if it's whipsawing in that range a lot, and you eat up your profits with commissions. Well, that and massive drops that miss your stop.

Thoughts?
So it's not quite riskless, clearly. Do you think $0.4 is enough compensation for the risks you mention above? Generally, the mkt prices these things quite efficiently...
 
 
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