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?
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?
