You asked about my rationale for the short strangle, as opposed to just writing a put or call. Well, you would typically sell a put when stock price is near the bottom of the trading range, and sell the call when stock price is near the top of the range and falling. (If you are inclined to sell calls, which I generally am not.) However, a short strangle is best initiated when stock price is near the CENTER of the range. I first scan for stocks that are near 50 RSI, then look for volatility and a fairly definable trading range that is in a general horizontal or slightly upward movement. Then I turn to Bollinger bands and look for possible strikes at least 2 standard deviations from price, outside the trading range. You want a stock with good volatility for high premies, but not something that has been truly crazy. It isn't hard to visualize a good candidate. Look at a daily chart of EBAY, for example. Good volatility and a defined trading range. With two premium credits on far OTM strikes a trade can often be worthwhile, whereas one premium written so far OTM might not be worth the effort. This approach also takes away the need to place your bets on price direction. Remember the analogy of price as a rubber band stretching up and down, but returning to the midpoint? You are going to let it swing, and give it plenty of room while still making money. And you won't need to concern yourself with direction.
This is NOT a substitute for writing puts, which I endorse, but a way to collect credits on options which you might otherwise not write. How many times have you looked at a chart for a good stock with great premiums, but it wasn't yet set up with price in the right position? With a short strangle, you have additional opportunities to profit.
-David |
