2x the option premium and expected long term gain, less than 2x the risk, all very generally of course.
How to Buy Low and Sell High in Today Market Using Options Wheel Strategy
- Thread starter winstonwee
- Start date
2x the option premium and expected long term gain, less than 2x the risk, all very generally of course.
My heart doesnt allow me to take a short straddle trade. But that is just me only
But you'd be OK selling a put or call alone, just not together? Just seems weird, when you get 2x the premium but less (and possibly way less, depending on the strike price you set) the risk?
Let's do some calculations instead repeating a meme.
The spot price of the stock is S= $100, option strike is at the money K = $100, expiry in one month, volatility is 25%, there are no dividends or interest rate involved, call price C =~ $3, put price P =~ $3 and as expected from put-call parity: C - P = S - K.
When i sell a pltr 25 put i know my max risk is $2500 minus premium receive
But if i sell a straddle my risk on the upside is unlimited. And if a short sequeeze occur in pltr. I would be dead
Don't think the guy is trying to sell anything, just wanted to share an option strategy that's making him some money and find out any pitfalls and solutions to those pitfalls from everybody. The thing with options is that it's profitable until it's not. With every single strategy, there is always always a pitfall that will eventually bring you losses. This "wheel" strategy is no exception.
This strategy is a directional move that hinges on the stock being in an uptrend but if the stock is indeed in an uptrend, you could've been much more profitable if you just buy the underlying stock itself, hold it and then sell it later afterwards when the price goes up or if you want to buy the stock with less investment, just buy the call option and then either sell the option afterwards or exercise the option afterwards to buy the stock and then sell the stock if a dividend happened to be paid during the holding of the option.
This "wheel" strategy is such an inefficient way to acquire and sell the stock when With this strategy, assuming that the stock is in an uptrend as you correctly predicted then you will always always be buying the stock above the market price and selling it below the market price at the same time. The only reason why you would be able to buy the stock through assignment from the put is because your put strike is higher than the market price of the stock so you could've bought the stock at a much lower price in the market but you end up buying the stock at a much higher price with the difference between the market price and the strike price larger than the premium that you received by selling the put in the first place. And then assuming the stock goes up afterwards, again you will be forced to sell your stock cheap when you could've reaped a much higher price in the market again possibly with the difference between the market price and the strike price being higher than the premium that you received from selling the call. So this strategy is forcing you voluntarily overpaying to buy the stock and then denying yourself the full profit when selling the stock for just a tiny bit of compensation from the premiums sold when you were and at the same time leaving you still exposed to unhedged, unmitigated losses.
To me, the only way this strategy could possibly be worth it is if the stock is really illiquid or extremely restricted from buying and selling like in the GME and other "meme" stocks cases by several brokerages and acquiring the stock and later on selling the stocks through the options is the only way otherwise it's really not that worth it.
This strategy is a directional move that hinges on the stock being in an uptrend but if the stock is indeed in an uptrend, you could've been much more profitable if you just buy the underlying stock itself, hold it and then sell it later afterwards when the price goes up or if you want to buy the stock with less investment, just buy the call option and then either sell the option afterwards or exercise the option afterwards to buy the stock and then sell the stock if a dividend happened to be paid during the holding of the option.
This "wheel" strategy is such an inefficient way to acquire and sell the stock when With this strategy, assuming that the stock is in an uptrend as you correctly predicted then you will always always be buying the stock above the market price and selling it below the market price at the same time. The only reason why you would be able to buy the stock through assignment from the put is because your put strike is higher than the market price of the stock so you could've bought the stock at a much lower price in the market but you end up buying the stock at a much higher price with the difference between the market price and the strike price larger than the premium that you received by selling the put in the first place. And then assuming the stock goes up afterwards, again you will be forced to sell your stock cheap when you could've reaped a much higher price in the market again possibly with the difference between the market price and the strike price being higher than the premium that you received from selling the call. So this strategy is forcing you voluntarily overpaying to buy the stock and then denying yourself the full profit when selling the stock for just a tiny bit of compensation from the premiums sold when you were and at the same time leaving you still exposed to unhedged, unmitigated losses.
To me, the only way this strategy could possibly be worth it is if the stock is really illiquid or extremely restricted from buying and selling like in the GME and other "meme" stocks cases by several brokerages and acquiring the stock and later on selling the stocks through the options is the only way otherwise it's really not that worth it.
Now if the stock pays $5 dividend in 30 days, that's a dividend yield of -Ln(95/100) / (30/365) =~ 0.63. Plugging that into the Black-Scholes formula:
Parity relation: C - P - D = S - K, so 1 - 6 - 5 - 0.
Sell naked put, get paid $6.
Sell call and buy stock, get paid $1 option premium + $5 dividends = $6, same as the parity position.
Well, they are equivalent... as long as the estimated dividend is the same as the realized amount. Like implied vs realized vol, the dividend entered in option pricing formula is only a prediction and the actual paid amount may be lower or higher.
Parity relation: C - P - D = S - K, so 1 - 6 - 5 - 0.
Sell naked put, get paid $6.
Sell call and buy stock, get paid $1 option premium + $5 dividends = $6, same as the parity position.
Well, they are equivalent... as long as the estimated dividend is the same as the realized amount. Like implied vs realized vol, the dividend entered in option pricing formula is only a prediction and the actual paid amount may be lower or higher.
Yes, it’s always possible to say “but if something unexpected happens than it will be different.” Duh
I sell strangles on stuff like PM, PG, PEP, COST where I'm not expecting a big move either direction even ahead of earnings. I would not sell a call on a meme stock. I did sell puts on GME far OTM (10 strike and 12 strike after it had already moved to $100 and so far those worked out well...already took half the position off at 70% profit). Bottom line, it's hard to use a one-size-fits-all system for selling options. You need to know your risk and assess each opportunity individually.