So, an out of the money call has a strike price that is ABOVE the spot price. An at the money call has a strike price AT the spot price. An out of the money call has a strike price BELOW the spot price. With puts, its the same, just reversed. So, for the ultimate protection, you would sell an in-the-money call and an in-the-money put. The deeper in the money, the more protection. An example. Stock is trading for $20. You sell a call with a strike of $15 for $5.20, and a put with a strike of $25 for $5.20. So you collect $10.40 in premiums. Stock has to rise or fall *more than* FIFTY PERCENT before you lose a dime. Stock on average (assuming put-call parity or whatever its call, which is not likely the case, but just assuming that for simplicity for example purposes) you win 40 cents, pretty much risk free. Any further questions?
Disagree. Selling puts is a great way to acquire stuff that you want anyway at a discount...just have to be absolutely certain that you want it at the given strike before you write it.
That's a strangle, not a straddle. Straddle has common strikes for both the put and the call. Both cannot be OTM.
"This is the same as the 15/25 strangle give or take a few cents and nothing is risk free " Great points and a few cents can be a big deal as these options model to about a 9.90 bid with a 30Vol. and a 1.6swap rate for 30 days. On a day like today if the vol. spikes and the stock didn't move you incur some pain - then there is early exercise. Don't think that where the OP was going. It's called shorting the guts and it is generally a very short-term vol. play. Sell it on a day like today and hope(pray) for a vol. crush tomorrow.
Thanks gotthatintoya and ET180, I guess strangle is the right terminology, not sure why when I read up on it there were calling it a short straddle. So its the short STRAGLE, both deep in the money, that is low risk (relatively speaking), probably low to mid reward. Thanks.