im assuming he does know what he’s doing. But someone in the industry pitching ditm strangles is definitely not normal
Like the most common way to do this is to buy a DOTM put in a high tax entity at an inflated price that you sell to a low tax entity. The low tax entity buys another put to protect itself. And the low tax entity generate excess profits. this is super common and I almost did it bust decided against it. There are entire island economies based on this concept
Sounds like he does? In a euro-convention series a year out at 30% ITM. I’m not going to waste the time to look, but this is beyond dumb.
well in my case it was going to be structured by an insurance professional and the put was really an insurance policy on an act of terrorism.
no he doesn’t. 30percent prob has some premium given vol is like 25 but it’s beyond dumb to trade the itm for the premium. i traded itm options for a tax arb but they were across entities and the option was core to the position (ie there was a specific oppportunity)
I would not make this trade (unless there are specific reasons). It depends all on your purposes, which so far people are just trying to wildly guess. If instead, you like short options for a systematic long-term profit in a safe non-suicidal way you may consider my algorithmic approach, explained here on ET.
Ok if you are looking for market-neutral instruments as how you define it, options really are not what you are looking for as it is a derivative and is one of the riskiest instruments especially the options strategy that you are taking, selling an ITM call and a put. This strategy that you are describing is called a strangle and is one that has the highest risk and this particular combo is almost a guaranteed loss simply because the strike price difference is always going to be bigger than what the option price can compensate. So if you want market-neutral investment instruments, options is definitely not an option (no pun intended) especially if your client has a low to medium risk acceptance. According to your client's risk tolerance, the best investment instrument is actually US T-Bills or mutual funds or if your client really wants exposure to SP500, passive index funds, so that way your client can get higher returns with lower management fees. In terms of taxes, there is no such thing as "needing" to sell options as the treatment for shorting options is the same as for any short sales. Profit/losses on options buying or selling are considered short-term capital gains/losses and are treated as such. That's as far as I know. It's best you consult a tax attorney or tax accountant regarding this. But if I were you, I would ask your client what he/she prioritizes, earning a healthy positive return or saving on taxes as the two are sometimes conflicting objectives in that you can't have both.