You don't understand, Harmo.
<< Correct me if I'm wrong but I thought a strangle requires a volatile price move.>>
You don't buy 'em, you sell 'em.
Suppose you own a stock you like. Say RIG. It's around 75. You bought it awhile back, maybe around 60. Or even cheaper, further back. You still like it. But you aren't too sure just how high it may be going near-term, given oil prices may weaken further.
On the other hand, you wouldn't mind picking up some more, if you could get it cheaply enough. 'Cause you still like their long-term prospects.
Such a dilemma, what to do.
Here's what to do. You sell a call, at 80. That's covered, since you are long the stock. And you sell a short naked put, maybe at 70. Or maybe even 65. [And that put is naked, whatever UF says, whether there is cash in the account or not]. And then you just sit there.
If your stock is called at 80, great. You've just cashed in a nice profit, at a higher price than the market was when you sold the call. Plus, you kept the premium for the short put!
If your put is assigned, great. You've just bought some more RIG, a stock you like, at a lower price than when you sold the put. Cool! And since you had plenty of extra margin in your account, no problem; you were thinking of buying some more RIG anyway. Plus, you kept the premium for the short call!
But maybe......just maybe.....[and it's surprising how often this will happen].....RIG stays in the range all the way to expiration. WAY COOL! You still have your stock, and picked up some nice change along the way! You may even be so happy, you decide to repeat the process another month or two out!!!
<< Selling both P and C against cash is very risky... your exposure is endless, you must have cahones to spare! >>
Nah. It isn't risky, it's conservative!
Remember: you don't BUY 'em, you SELL 'em! |
