Am I overlooking the risk?

I'm new to trading options, and I've been doing a strategy for the past few months that's given me some success. I don't see much risk, and it seem like it's "too easy", which is why I think I'm overlooking something.

I sell a put below current stock price, and sell a call above current stock price...basically betting that the stock will stay between these two prices, and both options will expire worthless.

My way of managing the trade day to day is that if the stock price falls below where I sold the put, I short the stock (at the put price) until it goes back into my "range" when I then cover.

Inversely, if the stock price goes above my call price, I go long on the stock. If it goes back below my call price, I sell the stock.

If it's out of my range at expiration, my owned stock will get called away, or my short stock will be covered since the put I sold is in the money.

I always have the cash in my account to cover the need to either buy the underlying stock, or short the stock. And, of course there is overnight gap risk which I'm exposed to, but am I missing anything else?

Thanks

 

What happens if the stock announces after hours big news and its up 30% the next day opening?

The naked call is SUPER dangerous.

I would not do that.

 

too high maintenance on this type of position unless you're trading 1-2 standard deviation away. if you are closer to the money on high beta stock gaping or fast moving market will kill you.

 

I do see your point, and it's a good one. What if I were to only use index ETFs? I've been doing strategy with CLF, and some large cap blue chips trying to minimize the overnight gap risk on news.

 

Well the one I just opened is with CLF. I sold calls at $75, and puts at $65. Stock is at $70. So, pretty far out of the money.

 

It's a nice way to rack up some trading losses.

 

You would be wise to allow for a scenario whereby the options get "pumped up" without any movement in the underlying stock. There can be some type of pending news whereby the "big money" is trading the options and not the stock. It can happen......often. :eek: :eek:

 

So you systematically short strangles and then delta-hedge only when you cross the strike? That's a recipe to get properly chopped every which way...

 

Yes if it enters and exits my "range" often, I can rack up trading losses, but
I get a "buffer" for my trading losses by the premium I collect from selling the options.

Okay so the overnight gap up risk can be large I'm seeing. Therein lies the risk.

 

The big risk is the "black swan" event either up or down. But, for those warning against this...do you also never hold an equity long overnight without a protective option? What if the stock opens 50% lower?

I'm not saying my plan is without risk...I just felt that the risk was lower since I'm watching my positions all day, even with the "unlimited" risk of the stock opening up well above my range.