Lance, I guess the strategy works, but on for a small profit. You're essentially putting on a deep in the money bear(calls) or bull(puts) spread. Since it is so deep, you won't get much in terms of risk/reward. For example, here's a market:
underlying is at $13
Oct 16 Calls are .15Bid .30Ask
Oct 17 Calls are .05Bid .20Ask
First of all, hitting these markets to put on the bear spread would actually incur a debit and the strategy is non-profitable no matter what. Essentially, if a good spread can be put on using client bids and offers, the market makers will do it themselves before you. Even if you could put this spread on for a credit, your profit potential might be .10 cents with .90 cents of downside. That is not a good risk/reward. I'm a market maker on certain options on the TSE and I've seen people sell low priced out of the money options for months, only to blow all their profits and more when the stock suddenly moves violently against them once. Basically, you want to sell low priced strangles, dangerous! A good strategy for limited downside would be to wait for certain options to get out of line and put on a bear or bull spread depending on your bias towards the stock. But try to look for something closer to the money, and look for good risk/reward ratios like spend .30 to make .70.
Good luck,
Hans |
