Opinion on this strategy

Quote from jkgraham:

When you mentioned that the stock was less volatile it dawned on me that this strategy has a name. It’s called a Short Strangle (covered at that); and like you said it is a neutral strategy. Since it's covered you won't have unlimited upside risk like an uncovered position.

Anyone can dog it for its disadvantages, but personally I believe that if the investor applies it to the right stock, at the right time and is willing to accept the known risk and consequences, then they can do whatever they want. In my short time in the options community I have already discovered that 9 out 10 option traders will tell you that your strategy stinks unless it’s one that they utilize themselves and even then they’ll point out the disadvantages and say it’s not for you.
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It's not a strangle or a even covered strangle. It's equivalent to 2 NPs. That means risk down to zero.

No one is dogging it. Someone just stated that CC's and NP's have lousy R/R ratios. That's true regardless of what any investor thinks/does.
 
Yes, short strangle seems right name for this (after reading about it). I think this strategy is good for less volatile stocks. like Canadian Banks. (BNS, RY etc)

Thanks all for the reply.
Happy trading.
 
Quote from jkgraham:

Why is it not a Short-Strangle?
Is this web-site wrong?
http://www.theoptionsguide.com/short-strangle.aspx
Why do we have to convert it to two naked puts to analyze it?
Why can't we just say it's one naked put and one covered call since that is what it is?
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We don't "have" to do anything. We could even make up a name... let's call it the Iron Walrus. Doesn't change anything.

The point of some of the posters here... and I would agree on this... is that the P&L and potential risks for a portfolio of "two naked puts" is immediately easier to visualize than the wordy explanation of the original post.

What do you think of when you hear naked put? Downside risk equivalent to price movement down, upside potential limited to initial premium. That's what this portfolio will be doing.

(And no, the portfolio as a whole is *not* a short strangle... because a short strangle is easily understood as losing in the case of large price moves in either direction. Naked puts, on the other hand, are profitable - but limited to original credit amount - in the case of a large move *up* in price... and that's exactly what would happen in this case.)
 
Quote from learnnew:

Yes, short strangle seems right name for this (after reading about it). I think this strategy is good for less volatile stocks. like Canadian Banks. (BNS, RY etc)

Thanks all for the reply.
Happy trading.
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If a stock isn't volatile then the options won't have much value and getting $1.00 might not be possible. BNS and RY have options with strikes $5 apart and those near the money for May are about $0.10 for BNS and $0.30 RY. RY June options near the money are about $0.80.
 
Quote from jkgraham:

I'm so confused!
If the stock stays between $46 and $54 neither option is exercised and he keeps the two premiums, right?
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This is exactly why it's easier to think of this as two puts at $46 and $54, because it's easier to visualize.

What's the best possible outcome? It isn't if the stock oscillating between $46 and $54... it's if the stock goes to $54 or higher. So what if the call gets exercised? That's not necessarily a bad thing. He would've received $4 more/share than what he paid for it at $50, + $2 in premium.

What happens if the stock sat at $46, and neither the short call or put got exercised? Is that a "good" thing? He still lost $4 due to decline in the value of the long stock that he owned... and in fact, that's worse than the $2 in premium that he collected.

So, again: the resulting P&L of this "complicated" portfolio is identical to selling a naked put at $46 and another naked put at $54.
 
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