Sorry of these basic questions. I am trying to understand various strategies. What is the risk involved in a covered short straddle. Here is the trade. On Friday AAPL closed at $76.30. JAN 07 $75 CALL - $15.10 JAN 07 $75 PUT - $10.80 I will buy the stock and sell the stradlle. I can keep the premium and surrender stock and collect $7500 , if the closing price is not $75 on Jan 07. I will make 33% profit. What is the risk involved here.
If Apple falls below $50.40 at expiration your paper loss will be the difference between $50 and the price of Apple stock. In addition you will be assigned more shares of Apple which you can sell immediately to minimize any further loss. If you like Apple at $50 maybe the above drawback does not bother you, but remember, not so long ago Apple was in the thirties. Don
Pardon my ignorence. What is $50. The strike price in the above example is $75. Why would I get more shares of Apple?
because you just have a covered call and a naked put. if aapl falls your put is uncovered and you will have to buy apple shares at 75.
The synthetic dissection leaves him short two Jan07 75 puts. Do you want to be short two AAPL 75 puts? You're long 100 deltas and short a bucket of vega. Yes, looks like another easy money strategy; ring that cash register!
and the downside loss starts at ($75 â ($15.10 + $ 10.80)/2) $ 62.05. Not $ 50.40. Keep them coming....
His b/e to expiration is simply the strike - premium on the two puts. $75.00 - $10.80 = $64.20 on 200 shares. Of course, his loss begins with any downtick.
But he didn't sell 2 Puts. He received a total premium of (15.10+10.80) $ 25.90, and because of his long position he is now net short 2 Puts. Divide the premium by 2 ?
Synthetically, he did exactly that: Long 100 shares + short 75c = synthetic short 75 put Add the natural short 75 put = Short two Jan07 75 puts at 10.80