Question about Short Straddles

[tsfx]

So you are selling strangles and not straddles.

he is still selling straddles. put and call strikes are the same just not atm.

 

[Atikon]

he is still selling straddles. put and call strikes are the same just not atm.

Sell an ATM straddle a couple of months out (where I own the underlying stock and have cash collateral for selling cash-secured put), and then adjust the straddle to follow the stock price as it changes over time to make sure straddle stays ATM. So if the stock moves higher, move straddle strike price up, and same for lower. My guess is that the adjustment should not cost much (I did a couple of such adjustments today on NIO and got credit for it). If the stock does not move much for a few weeks the transaction can be closed with the time decay gains, or continue adjusting till it gets closer to the expiration and close then.

My bad, he said on page 1 he's moving the ATM Straddle on page two he mentions he likes to keep the straddle below ATM to make money on the Put so I assumed he follows with the Call ATM and the Put slightly below the ATM Strike.

 

[amit.mahajan12]

So you are selling strangles and not straddles. I presume you are not selling ITM Puts. You should have an Idea how high the stock will move and then choose a strike accordingly. If I'm certain the stock is going to move up, i wouldn't sell on the Call Side. You can sell a put and buy a call debit spread, thus the put will expire worthless but it will finance your call debit spread. Once the stock moves up you benefit from the increase in value of the call debit spread, stock move and the value decrease of the put. Google Jade Lizard

No, I sold straddle. Like I said, I own NIO and I earlier sold call at I think 7. The stock shot past it, and I realized I did not want to sell the stocks. So I rolled it up a few weeks, but took a loss. To compensate for the loss, I sold a put at the same strike price as well. Now my intention is that I am somewhat prepared to sell my stock at the higher stock price if the stock continues to be higher. The interesting thing that I noted was that as the stock went higher, I changed my straddle strike price from 11 to 12 to 13, and each time I got a credit (without changing the expiry date of the straddle). Let's say the straddle today costs around 6 dollars. And I keep moving it to keep it close to the current stock price, and with time the cost of the straddle (as we get closer to expiry) goes to say 1 dollar. Then I do make the 5 dollars, minus any debits on moving the strike price (which so far have only been credits). I don't have a firm opinion about the direction of the stock. My main goal initially was to gain some return while I owned the stock, and I was prepared to sell it. However look at the rally I changed my mind and decided to keep it a bit longer, and hence I ended up selling straddle.

 

[amit.mahajan12]

I am new to options but not as new as you. Let me share with you what I learned from ET:

There are two approaches to covered calls:

1. Covered call, trade as a combination, meaning you open, close your calls and underlying as a single trade.

2. Covered call, but you have no intention of selling the underlying. You want to "generate" free income.

If your approach is 1, you trade traditional covered calls. If your approach is 2, you are essentially writing naked calls.

In doing 2, you are holding the underlying because you believe it is a stock you want to own. Yet you are writing calls betting it would stay the same or drop?

Your hunch was correct, it is a stock you want to keep. The stock moved up nicely and your calls are now at a loss. Because you wanted to keep the stock, you are forced to sell at a loss.

To add insult to injury, you closed it out at a loss and wrote another calls another bearish bet. Us newbie think it is a "repair" but look at it carefully, you have just increase your risks. If the underlying keeps going up, your losses will grow. So you wrote a put. At least now you placed a bet consistent with holding the underlying long term.

My humble suggestion is next time you put on a covered call, ask yourself the same question above which @Maverick74 taught me when I first joined ET.

The most important questions for you: What is my current opinion of the underlying and how do I minimize my future risks. Asking us you are asking our opinion of the underlying because my action depends on that question.

Have a good day.

My question was not about the underlying in any way. My question was is this a strategy that has been discussed/known. Because I felt based on my limited experience dealing with straddles for 2 weeks, that keeping it close to the stock price seemed manageable and with that I could hope to keep doing it until the straddle price goes down from 6 dollars to 1 or so as we get closer to the expiry.

 

[amit.mahajan12]

If u r selling a straddle then u r benefiting from low price movements at the expense of large movements.

Can you please elaborate on this? Or point me to some resource that can help me understand this better? Thanks!

 

[amit.mahajan12]

What I was also looking for was a straddle cost vs stock price graph for a given time. That is for a fixed stock price as of today, or a given day in the future, what the straddle cost would be for different strike prices. I understand that going deep ITM for call/put would raise the price, so I expect it to be cheapest ~ATM. But I don't think that's exactly true because in my experience when I moved my straddle closer to ATM, I got some credit. My newbie guess for a possible explanation to this is that I am moving in a direction that the market is betting against. That is, when I am moving from lower strike price to higher (but still less than the stock price), and I am still getting credit, the options market is betting more that the stock will go down? If that is correct, what chart/graph/metric would give a better explanation/idea about this? And if that is not correct, well, please help me understand straddle price vs strike price relation! :/

 

[tsfx]

Can you please elaborate on this? Or point me to some resource that can help me understand this better? Thanks!

Again, If you are selling options you are benefiting from low price movements because of the time/price change relationship. Premium decays in YOUR favour. The downside of selling options is large price movements where the stock price eats up more money than time gives you.