It's not a strangle or a even covered strangle. It's equivalent to 2 NPs. That means risk down to zero. No one is dogging it. Someone just stated that CC's and NP's have lousy R/R ratios. That's true regardless of what any investor thinks/does.
Yes, short strangle seems right name for this (after reading about it). I think this strategy is good for less volatile stocks. like Canadian Banks. (BNS, RY etc) Thanks all for the reply. Happy trading.
We don't "have" to do anything. We could even make up a name... let's call it the Iron Walrus. Doesn't change anything. The point of some of the posters here... and I would agree on this... is that the P&L and potential risks for a portfolio of "two naked puts" is immediately easier to visualize than the wordy explanation of the original post. What do you think of when you hear naked put? Downside risk equivalent to price movement down, upside potential limited to initial premium. That's what this portfolio will be doing. (And no, the portfolio as a whole is *not* a short strangle... because a short strangle is easily understood as losing in the case of large price moves in either direction. Naked puts, on the other hand, are profitable - but limited to original credit amount - in the case of a large move *up* in price... and that's exactly what would happen in this case.)
heech I deleted my original post because I thought it sounded too argumentative but I appreciate your response.
I'm so confused! If the stock stays between $46 and $54 neither option is exercised and he keeps the two premiums, right?
If a stock isn't volatile then the options won't have much value and getting $1.00 might not be possible. BNS and RY have options with strikes $5 apart and those near the money for May are about $0.10 for BNS and $0.30 RY. RY June options near the money are about $0.80.
This is exactly why it's easier to think of this as two puts at $46 and $54, because it's easier to visualize. What's the best possible outcome? It isn't if the stock oscillating between $46 and $54... it's if the stock goes to $54 or higher. So what if the call gets exercised? That's not necessarily a bad thing. He would've received $4 more/share than what he paid for it at $50, + $2 in premium. What happens if the stock sat at $46, and neither the short call or put got exercised? Is that a "good" thing? He still lost $4 due to decline in the value of the long stock that he owned... and in fact, that's worse than the $2 in premium that he collected. So, again: the resulting P&L of this "complicated" portfolio is identical to selling a naked put at $46 and another naked put at $54.