MR_F; Lets assume that XYZ closes at 75. The option position shows a one point gain at expiration. But you are short the 60 calls and are assigned. You exercise your 65 calls and netting that against the one point gain leaves you in the hole by four points not counting transaction costs. The other thing I would question is whether you could actually make the entries at the premiums you use. Are they actual or arbitrary in your example? The same situation exists if XYZ closes at 50. You're short the 55 puts and get assigned. Exercise the 50's and net net you're down four. There are six primary synthetic positions as follows: Sythetic Long Call = long stock + long put "" "" Put = short stock + long call "" Long stock = long call + short put "" short call = short stock + short put "" short put = long stock + short call "" short stock = short call long put An interesting post. Let us know how it works out . Good luck
Actually, I believe Mr. F's math is correct in that no matter what happens, he will end up with a gain, regardless of where the stock closes. In white17's example, the stock is at 75 the day of expiration. Based on your options positions, you are forced to short the stock at 60, but have the 65 calls which you can exercise and buy the stock back at 65, meaning that you have a 5 point loss on that part of the trade. However, you still have the 6 points in profit that was pocketed by selling the naked calls and puts, thereby giving you a net profit of 1 point on the whole trade. So, no matter whether the stock closes at 75 or 275, the way you've set up your options makes the closing price irrelevant above 65 or below 50. However, here is the fly in the ointment. Your example assumes that after opening your synthetic long position the stock moves up, allowing you to reasonably open your synthetic short. What if, instead of the stock moving up from 55 to 60, as in your example, the stock continues to tank after you've sold your 55 puts and bought your 65 calls? At that point, you'll not be able to get any decent premiums selling the 60 calls and buying the 50 puts will be expensive, leaving you hanging in the wind and looking at being assigned a stock at 55 or having to buy the puts back at an inflated price. Therefore, this play only is feasible if you are correct in guessing how the stock will move at the beginning of your play. To me, a straight options collar is still the safest bet.
Zboy is correct. I was looking at the value of the option position at expiration vs. the net loss on the assignment which is what I thought Mr_F was also looking at. I also agree with ZBOY about the entry points which is why I asked the question about actual or arbitrary premiums.
Yes indeed that is the fly in the ointment. My play would be contingent on the stock maintaining the support and resistance levels long enough for me to establish both synthetic positions (I also daytrade this highly volatile stock and it is very possible to establish both positions in the same day). Should the stock continue down after I establish my synthetic long position, my Plan B would be to daytrade the stock down with a short position as a defensive measure (this would effectively adjust my entry position) and then decide whether to terminate the original play. A related technical question: I use IB and am not sure of the consequences of ending the expiration period in a naked call or naked put position by not establishing a long position in the stock. Would I be violating any trading rules in this case? Having the cash to cover would not be a problem. Or would I be obligated to make sure I am not in a naked position at then end of expiriation? Thanks for your comments. Regards
Some of the technical analysis I've done lately says we may have some huge downside soon. We have been hitting resistance lately and no volume. If we break some of these resistance levels I'm looking at I'd feel safe for the short term selling puts (short term here meaning 1 to 2 months) If we don't break there might be some huge selloffs like you have never seen and selling puts could have you in debt to your brokerage firm for years. There is also a reason why a lot of firm don't let you sell options naked. Rtharp
Thank you for your comments. My 401K funds have been safely set aside for some time in an income fund as I wait for a double bottom in the market. Your point on the dangers of naked options are appreciated and well founded. Regards
Mr F, With regard to your technical question with IB, if I'm reading your question correctly, you're asking if you can keep your naked positions open through expiration. The answer is absolutely. What happens is if your naked position (let's say 3 naked puts) is in the money at expiration by 3/4 of a point or more, you will be assigned the stock, and come monday, you will find 300 shares of the stock sitting in your account, with of course the appropriate amount of cash taken out of your account to pay for it. Likewise with in the money naked calls, you will find yourself short shares of the stock on monday. If for whatever reason you don't have the money to cover the potential position come expiration day, IB automatically closes the option position whether you like it or not. Many times I have let in the money naked puts go through expiration in my long term stock account, since I wanted to own the stock anyway.
Hi there, Actually as a broker I recommend experienced traders with medium and above size accts to sell premium because I believe the odds are there. Currently I am looking at selling july sp 1350 calls and july sp 1150 puts. Also sold unleaded calls which we bought back. Good premium for the time value. Since this is somewhat in the category of advice, I better put a disclaimer in here... Important Please Note: The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.
Yes, I read in some article that Wade Cook's company lost hundreds of thousands of dollars trading stocks. But made millions on the books teaching people how to trade stocks. Isn't that ironic? By the way, his company's stock is now at 0.05 dollars or 5 cents. http://quote.yahoo.com/q?s=WADE.OB&d=c&k=c1&a=v&p=s&t=5y&l=on&z=m&q=l