Quote from jones247:
I'd like to share a technique that I've been analyzing for quite a while. I was apprehensive because of how simple it really is. I've been deluded into believing that the only way one could be consistently profitable in the options market is to develop a highly complex and intricate trading strategy. I've experimented with combining several spreads (i.e. Iron Condor with a call and put backspread). I've tested martingale, scaling and pyramiding. I've implemented several TA indicators for timing and direction. I've considered the HV relative to the IV and the skew...etc...etc...etc...
However, it all really comes down to a simple technique that trumphs them all...
OTM short strangle, with a "synthetic" collar as an exit strategy if the strike price on any leg is reached.
Worse case - breakeven...
Best case - 20+% return per month (assuming futures options)
Your thoughts... Tell me where I'm "off-base"...
Walt
Lets break it down assuming you added long stock and short put.
Short strangle is -p -c
You are saying you add long underlying +S
and long put +p?
Without getting into the strike selection you are left with a bear put spread assuming long put is within the strikes or a bull put spread if long put is at a lower strike.
Assume it is a bear put spread and stock tanks after making adjustment. You exercise long put to cover stock, you are still short a put.
Assume it is a bull put spread and stock tanks after making adjustment. Exercise long put to cover stock and short put is still naked.
Assume stock rallies hard after making adjustment. You have stock plus -c which is covered call so profit is capped to upside. Cost of put eats into strangle premium so you might have some profit to upside.
I think adding long stock and long put only has potential if stock rallies strong to short call and then you add the stock and long put. If it keeps rallying the position might have a tiny gain left.
I cannot know for sure because I am just looking at the big picture and not with any realistic prices.
All of this depends 100% on when you add the stock and long put and what you sold the strangle for and time to expiration and volatility changes. With so many variables I doubt you can claim a risk free adjustment or position with worst case scenario a breakeven.
If all you could do is one simply adjustment to turn a losing position into a profit, then there would be no risk to begin with, and hence no return greater than the risk-free rate.
I am afraid the jury is still out on this hypothetical suggestion. I think you will see it better if you paper trade one with real prices but I doubt you will see as good a result as you expect.
Assume you add long stock and short put and market tanks instead of keep running higher and you get whipsawed around?
