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In a message dated 98-01-30 17:49:44 EST, peterq@xxxxxxxxxxxxx writes:
<< Would appreciate your comments on the following options strategy:
1. Choose a stock that has had a significant run up.
2. Volatility must be high.
3. Sell a strangle (sell call, sell put) such that breakeven range is
-10%, +5%
4. Strike price near current market price.
5. Time to expiry atleast 30days. >>
Hi Peter,
The strategy you are describing is sometimes called an uncovered
straddle write ( not as exotic as calling it a strangle, but more
descriptive). It is a neutral position, meaning the writer has no strong
opinion on the direction of the stocks movement and the stock is unlikely to
move very much. It has limited profit potential and large risk potential,
but can be profitable if the stock remains relatively unchanged at expiration.
Rather than run ups and high volitility, you should be looking for the exact
opposit, a flat chart with low volity. The maximum profit occures if the
underlying stock is unchanged at expiration.
In a volatile market losses can occur very rapidly. The best
stratagy to exit in this case is to buy back the in the money option when it
reaches the price of the straddle and hold the other. There are other exit
stratagies that involve buying a call(s) in a big up move or put(s) in a down
move to limit the amount of risk.
In general this is not a simple strategy and must be watched very
closely. Before attempting it you should have a through understanding of
options and what steps should be taken if the trade goes against you.
Good luck and good trading,
Ray Raffurty
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