|
PureBytes Links
Trading Reference Links
|
Selling out of the money strangle is a good strategy in a high volatility
situation, preferable over selling straddles. Of course, the risk is high in
selling naked options, but one will make noney when the volatility returns to
normal.
This strategy, however, should be employed when the stock price is relatively
stable. When the stock has had a run up like in your example, your risk is quite
high. +/-10%?
Girish Patel
TRaffertu@xxxxxxx wrote:
> 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
Attachment Converted: "c:\eudora\attach\vcard190.vcf"
|