Opinion on this strategy

Hi All,

I am learning the options, and have come up with this strategy. Please let me know if you have any opinion on this.

Here is the scenario:

1) I have ABC stock bought at $50.
2) Sell Put option with strike price of $46 (pocket $1 premium)
3) Sell Call option with strike price of $54 (pocket $1 premium)


Now these are the possible outcomes
1) Put and Call expires – No exercise –
Profit $200
2) Put exercises and Call expires
Liquidate my long stock, and proceed will pay to the executor to deliver me stocks (worth now $4600). I have stocks with me worth $4600 and $200 cash.
3) Call exercises and Put expires
Deliver my long stock, collect $5400. I have $5600 (5400 + 200) cash. No stocks.
4) Put exercises and Call exercises
Liquidate my long stock, and proceed will pay to the executor to deliver me stocks (worth now $4600). I have stocks with me worth $4600 and $200 cash.
Deliver my long stock, collect $5400. I have $5600 (5400 + 200) cash. No stocks.
5) Call exercises and Put exercises
Deliver my long stock, collect $5400. I have $5600 (5400 + 200) cash. No stocks.
Pay $4600 to take delivery of stock.
I have stock worth $4600 and cash $1000 (5600 – 4600).


Note : During this time of writing the option, I will be able to collect dividend too (if declared and stocks are sitting with me).

Question:

Is there any other scenario where I will have more loss than scenario 2)
Is there anything wrong OR missing in the above strategy?


Thanks for the help.

 

you have 2 similar trades. a covered call and a naked put. covered calls and naked puts have the same risk profile.

 

Here's your strategy simplified: sell 46 put, sell 54 put.

In other words, all you are doing is selling two puts with different strikes.

 

1) You're trading a short-strangle versus the underlying.
2) You have a covered-call AND a short-put
3) Outcomes 1, 2, & 3 should be common.
4) Outcomes 4 & 5 will be very, very infrequent.
5) You're capping your upside and magnifying your downside.

 

I agree with that.
The cap on the upside is one reason I'm learning other strategies and getting out of doing covered calls.
Doubling the down side risk well that's bad too.
Think Risk "Management" not "Mis-Management".
Stick with existing strategies that have already been developed instead of trying to invent your own. It's all been done before. (Was that harsh?)

 

To : MTE
>> Not really. See if stock remains at $50, none of my sold option will exercise. Whereas in your replied scenario $54 put will get exercised. So it's little different. Anyway thanks for reply.

To : nazzdack - Thanks for your answer. I agree.

To : jkgraham
>> Yes, but if the stock is not moving much (less volatile) then, practically risk is manageable (in theory potential to loss many be more though).

Thanks,

 

When you mentioned that the stock was less volatile it dawned on me that this strategy has a name. It’s called a Short Strangle (covered at that); and like you said it is a neutral strategy. Since it's covered you won't have unlimited upside risk like an uncovered position.

http://www.theoptionsguide.com/short-strangle.aspx

Anyone can dog it for its disadvantages, but personally I believe that if the investor applies it to the right stock, at the right time and is willing to accept the known risk and consequences, then they can do whatever they want. In my short time in the options community I have already discovered that 9 out 10 option traders will tell you that your strategy stinks unless it’s one that they utilize themselves and even then they’ll point out the disadvantages and say it’s not for you.

If you can get the Think-Or-Swim platform, check the Probability-of-Expiring and Probability-of-Touching calculations. I assume since you already know the stock is less volatile that you know the support and resistance levels. Also, beware of the earnings report date unless you already know that it never moves then either.

If you tell us the stock's real name I could check the POE and POT for you.

 

no its not. think it through. if your 54 put expires in the money where will you be in relation to the stock and premium?

 

Check the OP, the $54 option is a Call not a Put.

 

this is not true. this position has the same risk as 2 uncovered naked puts.