Well lets narrow the strikes a little. Stock is at 100. You could sell one 105 call and buy two 110 calls same month, typically the front month. Now you can change the variation on this millions of ways. You could sell the 100 buy the 105's. You could sell the 95's buy the 100's. You could change the ratio to 2 to 3, 3 to 4, whatever. You could have a market bias such that you think that 100 is the top and it's going lower, you might think its breaking out and it will shoot up from 100, you might think that its going nowhere or you may have no idea. The choices are endless. But never at any point are you exposed to unlimted risk. Of course you can do this obviously with puts too. Now not to jump all over Dreamer again, but he will go in and sell the 95/105 strangle and he will collect a little more preium then you will of course his margin for this position is about 10 times higher too. You only need to pay the strike diferential, he has to put down 25% of the underlying. Now when the stock opens at 150 next week because of a buyout rumour, you will make a killing on this position and Dreamer will be in Chapter 7. Yet if it does nothing both of you will be collecting the premium. The only thing you need to be aware of is that there is a sweet spot on the graph which is the shaded area between the strikes where you will lose money as it nears expiration. However at the beginning if the stock rallies slowly you will be able to close out of the position flat because the money you made from the calls will offset the naked call's loss. As the time nears expiration though those long calls will no longer come to your rescue. But look at all the ways you could profit. If the stock sells off, you make money. If it rallies a little you make money, if it spikes you make money and if it goes no where you make money. And you will never be wiped out. You could almost say this is one "Dream" of a strategy. LOL
yo, maverick, i like the ratio spread idea, starting to see a little light here, mucho gracias. thanx to all.
It's not a good example, I agree. However, even with stock at 100, the 5 put will still be worth 5 but that's only because volatility is infinite. The whole example is not very good, I must admit. I didn't want to be as rude (to you professore), as I appeared, so I apologize for that. My main point, and I think it's a valid one, is still that when you're getting more premium from selling options on one underlying compared to another, it's because that underlying has more volatility, which makes your short option a riskier proposition. It's important to be aware of that, but given your success, you obviously are aware and achieve to manage the risks and returns of options selling quite successfully. So, chapeau, and keep it up.
General rules for selling options. Because there was a litle bit too much of theorizing gpoing on and not enough specifics I would like to share what I consider good rules for a beginner to start with. 1/ sell no more then 30 days to expiration 2/ Delta has to be less then 20 3/buyCall( if selling Call ) father out of money for protection This is on the top of usual TA stuff like overbought stoch, divergence and whatever else might give you reason to take this trade. Walter
Maverick74, I usually just use a credit spread because you end up giving away most of the premium with a backspread. Of course, as you point out, you are alive in the event of a big move with a backspread. But these big moves are rare. And if they do not occur overnight, you can cover the short leg of the credit spread. Am I missing something here?