Is this strategy possible?

Discussion in 'Options' started by Sanaz3, May 27, 2010.

  1. Sanaz3


    I stated in my other thread that I'm virtual trading options for now and don't know much about Options trading strategies.

    What I have recently been focusing on and trying to figure out is: how to have a strategy in order to have net profits no matter which way the stock/underlying moves . And that's not impossible. If the stock moves up= net profit; moves down= net profit; so long as it does move, however small, and doesn't remain unchanged and more importantly, the method does not involve huge risk/loss. The common methods such as: shorting a stock and buying Calls, or going long and buying puts, covered calls and buying Puts...As far as I know, they all have break-even points, below/above which you may be at loss!

    So I am now mainly focusing on some methods, involving buying a combination of In-The-Money Calls AND Puts together expiring in the next month or two. For instance, if the market price is $5, buying only Calls of $3&4 + Puts of $6&7, in doing so I can see some profits in the range of 10-15% of the investment, no matter the next day the stock's prices is at $5.30 or $4.70. And the upside to this method is, even if the stock remains unchanged until the expiry date, all your calls and puts will remain in the money on the last day, resulting in a theoretical loss of less than 6-7% of the investment/trade. An example I worked out was: buying 12K worth of Calls and Puts on a stock, and in the worst case scenario, I would have ended up closing out my positions with max $600 loss...i.e. 5% of 12K. (this is the theoretical loss not including the commission/broker fees).

    So like I said, I am still learning but If you know there are already methods which employ similar strategies and are not based on speculation, and result in net profit regardless of the stock's direction, please feel free to discuss them here. Thanks.

    I used this online tool to tinker with my idea.
  2. I believe what you are doing is called a "strangle." You are basically betting on the stock making a large move beyond your long strikes. In this case, you are buying short term options, so you are at the mercy of time decay.
  3. With volatility high right now you might think about selling the strangle rather than buying it.
  4. Sanaz3


    To clarify what I really want to figure out: whether the underlying stock makes a large move or a small move, the result be a net profit in either direction. I want to take the speculation, hope, fear, gut feelings, greed, bearishness, bullishness...out of the equation, and it be purely based on the mathematics!
  5. most successful option traders are writers/sellers, not buyers. your strategy is not riskless just as everyone else's.
  6. Sanaz3


    ... but "IF" things go really bad against them, they could lose 400% loss! But what I am working on, is to remove the "IF" from the trade.
  7. This strategy may look attractive but it's not.
  8. you are hoping that the stock moves in a direction.......up or down. but i must tell you that on the other side, there are those who want the stock to be
  9. OP,

    Your first mistake is to compare your max loss, to the premium you are paying for your guts strangle. You can only look at long extrinsic value in this way. The guts strangle has more premium in it, because both call and put are in the money. The risk you are putting on is identical to a strangle where both options are out of the money. The difference between the guts strangle and the strangle is called the box. The box is worth the difference between the strikes you are using. Therefore, the 3/7 guts is worth exactly $4 more than the 3/7 strangle (minus some carrying costs, of course.)

    The total decay and break even points in your trade will be identical. However, like another poster already mentioned, the ITM options will have wider markets and much more delta per option. Thus you will probably experience extra slippage when you execute the order. Additionally, you will acrue fees to exercise your options on expiration, regardless of where the underlying is at the time. Stick to the strangle. Don't trade the guts.

    No strategy is a holy grail. They all have risk and rewards.
  10. Option sellers may do very well for 2, 3, even 5 years. Sooner or later, they all blow out.
    #10     May 27, 2010