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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: GROUND ZERO™ who wrote (1276)3/27/2000 12:32:00 AM
From: KFE  Read Replies (2) of 2317
 
GZ,

Much talk about your strategy of selling straddles against a position in the underlying. I think that someone asked what this would be called. If you were long the underlying this would be called shorting two puts since being long the underlying and short the call is a synthetic short put. If you were short the underlying it would be called being short two calls since being short the underlying and short the put is a synthetic short call.

You might get a slightly higher credit when employing your bullish strategy and a slightly lower credit when employing the bearish strategy than just selling the two puts/calls because the ATM call with usually have a slightly higher premium than an ATM put. The rate of return when just selling two option units could also be boosted by writing them against T-Bills in the account.

Haven't thought much about your strategy of reversing the position as the underlying crosses the strike price of the options sold. This would solve the problem of any big loss but my first impression is that I would be fearful of constantly getting whipsawed. When do you reverse the underlying position? Is it strictly when it crosses over the option strike price? Is it done on intraday movement or closing price?

As I said above I think that a greater rate of return could be generated by just selling two option units. I think that the strategy you mentioned should be looked into by those who like covered call writing. The down side breakeven point will be the same and the upside return will be doubled. You would just have to have strict cover points because once the downside breakeven point is reached the loss would be doubled. Triple digit annual returns are possible if the stock finishes at or above the strike price of the options and the expiration breakeven point would be significantly below the current price.

Example: Two stocks I like right now are TRMB & CEGE. If you were long the underlying and wrote an ATM straddle you could get a 46% return on TRMB in less than six months and 67% return on CEGE in less than seven months.

Regards,

Ken

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