help me out with this options strategy

Discussion in 'Options' started by jonbig04, Apr 28, 2008.

  1. I dont know what its called, im sure other people have thought it before....but it seems pretty solid.
    here's a rough explanation:

    You first buy, say, $10,000 in calls with the expiration 6 months a year away give or take for lets say $10 each struck at $15 or $12.50. So thats 10 contracts.

    You them write 10 contracts in calls expiring within a month or 2 for , say, $2.50 struck at $15. So thats $2,500 for your calls.

    What you want basically is for the underlying stock to stay relatively flat this way the options you sold quickly lose there value and thus you make your 2,500 no strings attached. however if the stock does go way up and even goes to $17 and the guy chooses to exercise his options you of course have to pay the difference between 17 and 15, but your longer option will have gone up much more than his option your profits there would at least cover your losse on the option you sold, or close to it...either way you might make a little or you might lose a little, but you dont lose your very much.


    If the stock tanks to say, $5. lets say our long calls drop by 75%, the options you sold will of course be worthless leaving you with a 50% loss. ouch ye, but for that much of a stock drop at least you have some left.

    Of course in your due diligence you would pick a stock that isnt likely to rally by some crazy amount or tank either, this way you make your $2,500 and only lose a little off of your long calls (your hedge) and net a nice profit. This is based on the fact that the VAST majority of options expire worthless, and of course all that money is going somewhere.

    Will this strategy work? its working so far in my optionsxpress simulator. whats this called? are there risks im not noticing? any info in this technique would be appreciated.
     
  2. Will this strategy work?

    No
     

  3. No? care to explain why?
     
  4. care to explain why?

    No
     

  5. hmm ok? anyone else?
     
  6. Basically Diagonal Spreads or like a covered call using long-term options and selling front-month covered calls.

    It works if stock stays perfectly flat month to month so you can keep selling premium and not have to take a loss if the stock drops too far or close if stock moves to far up.

    Do you know of any stocks that move sideways for 6 months while you sell calls? That is what makes it hard to do profitably or consistently (Just Dr. Terry who shills a newsletter promoting such a system a few years ago and lost money for all his subscribers)
     
  7. Thank you, man. I was too lazy to explain! That is exactly the reason why most of circular premium collecting strategies do not work. But if somebody did find the stock that is flat all the time then the premiums on the options would be very low.
     

  8. Thanks for your info. It seems to me it all about the premium you get when selling the calls. I was looking at motorola the other day at the calls expiring in a month were only 50c cheaper than ones expiring in a year! obviously if you can get that kind of premium your much more likely to make a larger profit.