I dont know what its called, im sure other people have thought it before....but it seems pretty solid.
here's a rough explanation:
You first buy, say, $10,000 in calls with the expiration 6 months a year away give or take for lets say $10 each struck at $15 or $12.50. So thats 10 contracts.
You them write 10 contracts in calls expiring within a month or 2 for , say, $2.50 struck at $15. So thats $2,500 for your calls.
What you want basically is for the underlying stock to stay relatively flat this way the options you sold quickly lose there value and thus you make your 2,500 no strings attached. however if the stock does go way up and even goes to $17 and the guy chooses to exercise his options you of course have to pay the difference between 17 and 15, but your longer option will have gone up much more than his option your profits there would at least cover your losse on the option you sold, or close to it...either way you might make a little or you might lose a little, but you dont lose your very much.
If the stock tanks to say, $5. lets say our long calls drop by 75%, the options you sold will of course be worthless leaving you with a 50% loss. ouch ye, but for that much of a stock drop at least you have some left.
Of course in your due diligence you would pick a stock that isnt likely to rally by some crazy amount or tank either, this way you make your $2,500 and only lose a little off of your long calls (your hedge) and net a nice profit. This is based on the fact that the VAST majority of options expire worthless, and of course all that money is going somewhere.
Will this strategy work? its working so far in my optionsxpress simulator. whats this called? are there risks im not noticing? any info in this technique would be appreciated.
here's a rough explanation:
You first buy, say, $10,000 in calls with the expiration 6 months a year away give or take for lets say $10 each struck at $15 or $12.50. So thats 10 contracts.
You them write 10 contracts in calls expiring within a month or 2 for , say, $2.50 struck at $15. So thats $2,500 for your calls.
What you want basically is for the underlying stock to stay relatively flat this way the options you sold quickly lose there value and thus you make your 2,500 no strings attached. however if the stock does go way up and even goes to $17 and the guy chooses to exercise his options you of course have to pay the difference between 17 and 15, but your longer option will have gone up much more than his option your profits there would at least cover your losse on the option you sold, or close to it...either way you might make a little or you might lose a little, but you dont lose your very much.
If the stock tanks to say, $5. lets say our long calls drop by 75%, the options you sold will of course be worthless leaving you with a 50% loss. ouch ye, but for that much of a stock drop at least you have some left.
Of course in your due diligence you would pick a stock that isnt likely to rally by some crazy amount or tank either, this way you make your $2,500 and only lose a little off of your long calls (your hedge) and net a nice profit. This is based on the fact that the VAST majority of options expire worthless, and of course all that money is going somewhere.
Will this strategy work? its working so far in my optionsxpress simulator. whats this called? are there risks im not noticing? any info in this technique would be appreciated.
