Yes, they can. And the liabilities associated with the drought can be an OOM greater than the total premium received.
Cattle Ranchers buying Cattle Futures ... A friend of mine used to sell strangles against stock ... thinking he was collecting twice the premium against his stock ... with no additional risk !!
Yeah, it's generally less risky than selling one side. If you're in index and you're taking a directional bet in a strangle they can work very well. If realized vol is less than implied then it's better to be strangled (neutral) than outright short one side. In components it's virtually always better to be in a fly or condor than the strangle. There simply isn't the edge loss associated with the risk-reversal debit (net wing vol edge loss in index). Imagine that you're short a strangle on a biotech and the vola runs from 80 to 120. You've essentially doubled your exposure in selling the strangle. I can't count how many times that's occurred IRL.
My wife inherited $4MM in stock and shorted puts "against" it. 1999-2001. Telecom (a CLEC). Her ex was an MD and thought he was the shit. Imagine how that worked out, but I am not naming the ticker, for many reasons.
You have a leveraged position on - you don't need for both to happen, you just need the expectation of either happening to go up. I.e. you are short two high-vega-convex wings and vols go from 25/15 to 30/20 on the two wings respectively. You margin will kill ya...
Yep, this is correct. Your mark-to-mkt and/or margin will kill ya. This exact thing happened to me in Eurodollars in 2007. Was a small position, in my case, so I could grin and bear it. One of my more senior former colleagues wasn't quite so lucky.
This will be my last one on this topic. All I am saying it is the definition that DEFINES a hedge, not the success of it. Just like a bad haircut, it is still a haircut. So if by definition her position is hedged, then it is hedged.(fully, partially or badly, that is a different question) A Texas hedge by definition is doubling down not offsetting the position, thus it is called a hedge only jokingly... End of story, I am sticking to it (and to my dictionary)...
What does it matter if it moved outside and then back inside the 2 SD level. She would have a margin call way before it even got to 2 SD.