Our Favorite Options Trading Strategy - The Strangle
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- Опубликовано: 28 сен 2024
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The Strangle options trading strategy is the combination of a short call, and a short put. Not only is this our favorite strategy, the strangle is a fantastic strategy for choppy, or sideways, markets. The goal is to profit from option time decay, as stocks trade sideways.
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Great video thanks! So if i understand well if the stock is close to $85 you can just protect your your call option by buying 100 stock? Ideally at $85 or less and therefore you lock your profit from the short put and neutralize the loss of your short call?
I’m so glad I’m watching these! Makes it much easier to understand. I’m going to take it slow and I’m going to be successful!
Thanks for the kind words and keep up the hard work! You got this!
You make me love stocks!
We LOVE to hear that! Keep up the hard work and let us know if anything along the way!
So you are saying sell a cash secured put AND sell covered call at same time??
I preffer the iron condor for neutral to protect vs losses
In theory yes, but we get paid to take risk! Strangle has more theoretical risk so it typically pays more over time.
What broker would let you do this? Unlimited downside risk.
Maybe I'm missing something but it appears 1/2 of this strategy is selling a naked call, which I understand is a great way to get wrecked if you get assigned. Especially if it's a high price stock/etf.
Hello! Selling naked strangles and/or naked puts and calls can certainly sound scary on paper. However, short strangles are probably the number one strategy that successful option sellers use. You can get "wrecked" in many ways while interacting with markets, while someone else using the same strategy is successful. It's more than just what strategy you are using. Entry guidelines and management mechanics are where edge is added or taken away. Hopefully that helps!
The potential loss on the upside is unlimited. I don't know many stocks that pump 500% in 30 days (GME, more meme and biotech maybe), or lose 80% so quickly, so if you don't go all in it could be manageable. You could also buy a cheap far OTM SWAN call (sleep well at night).
Good video , I have a couple questions though . What would be the win rate of this strategy ? If I had a small account , how would I manage risk to grow my account with the strangle strategy ? Also , what factors should I look for in the stock when making this trade to increase my chances of a winning trade ?? Thanks !
Thanks for watching! And great questions. With strangles (or any short premium trade) you can actually create whatever win rate you want depending on what the deltas of the strikes are that you are selling.
For example, selling a .10 delta put has a 90% probability of profit. Managing that trade early, say closing for 50% max gain, will even increase that probability.
The key is managing that "outlier risk" as you mentioned in your second question. You need to have a loss threshold in mind, and one that makes sense for the specific ticker you are trading and also the size of your account. That takes some fine-tuning and experience.
As for what to look for in the stock -- there's no perfect stock or setup for a strangle. Selling neutral premium like this is more about continuing to generate occurrences, rinsing and repeating the same type of trades in the same type of tickers, more-so than finding the BEST ticker or BEST setup to trade a strangle. Hopefully that makes sense!
with a small account you will want to try using a long or short butterfly strategy or a long or short brokenwing butterfly strategy. Very low cost and no "infinite" risk as strangle has.
5:00 NFLX example
Would this be a good strategy for less volatile stocks?
Kind of! The thing with the option market is that volatility is priced into the option. So a more volatile stock would have a wider neutral range to stay within, or might have a larger reward for the "same delta strangle." Said another way, you get paid for the volatility on more volatile stocks in some way. As traders, we find a balance and some personal preferences on what tickers we like to trade strangles on over time. Hope that makes sense!
I would think it's better to initiate the trade when I.V. is low. Is it cause high I.V. mean a bigger neutral range and you also receive a higher premium from the short options?
You nailed it at the end there! The higher the IV, the more inflated the option premiums are compared to what they are actually worth. That typically means we get bigger neutral ranges for our short strikes and/or larger premiums on our trades!
The platform you are using seems to require such little capital to perform. For most platforms i have heard of, and the one i use, Fidelity, you need to have 100 shares of the strike price in order to perform a short option.
Is this one of the reasons you use think or swim?
Hello! What you are referring to is a "covered call" where you need +100 shares of stock for every 1 SHORT CALL that you have. That being said, TD and TastyTrade seem to be some of the better trading platforms that cater to option traders like us. Hopefully that makes sense!
@@skyviewtrading Yes, I'm discovering that Fidelity seems to be the most strict when it comes to risk management. I may have to open an account with one of the platforms you mentioned.
Hey
I thought of an idea
When the stock reaches the break-even stage, we may sell and lose part of the premium and thus be saved from a loss
What do you think ?
This is one idea to "defend" losses, and there are pros and cons. But keep in mind, your breakeven level is your breakeven AT EXPIRATION... So your method you mentioned would not exactly "save you from a loss"... If the stock touches your breakeven before expiration, there will still be time value on the option, and therefore you will have an unrealized loss. Of course if your breakeven is touched, the stock has a 50/50 chance of going up or down from there and time decay is going to be your friend. But on the other hand, the stock can keep going beyond your breakeven, which would cause losses to compound.
We have our own specific criteria we use to defend losses on strangles, which involves adjusting the trade (moving the strikes and/or expirations) to improve the breakeven point to help us turn the loser into a winner, while also "slowing down" losses.
How is the required collateral calculated?
Good question! It's a math formula from the broker. Back-of-the-envelope math is 1 contract will require about 10-20% of what is required to buy 100 shares of stock.
What is the advantage over an iron condor? Iron Condor is less premium but has a protection
More premium. I like the Jade Lizard if you don't mind a 100% loss risk (still very unlikely). I don't like the idea of a short squeeze moving a stock into the stratosphere when I need to cover a call. However, the far OTM long call can be far out, and maybe even have a longer expiry date, so you could use it repeatedly for this strategy.
What do you think about margin accounts?
Much appreciate your videos.
Blessings 🙏🌼🌟
Hey! Thanks for the kind words! To trade options you actually need to be approved for a "margin account." However, don't get the term "margin" confused here. We can only trade options with the amount of cash in our account. So we cannot trade options with "borrowed money." Hopefully that makes sense!
Great video mate - what is this software you are using?
Thanks! We use TastyTrade as our preferred broker!
What do you do if your trade starts to lose money and you are worried it will go too far?
Hey! We have adjustment mechanics ready to handle that when it comes. We could roll up/down the untested side within the same expiration cycle. We could also roll out the tested side to the next monthly expiration cycle. Both are good and have their place depending on how many days are left until expiration
Basically an iron condor without the insurance.
Do options with longer expiration date bring more profits if i exit the trade on the same i go long or short ? Since it won't be affected by time decay?
Hey! I'm a bit confused on what you're asking here -- but it's very likely there will not be much profit on a longer dated option that you exit the same day you enter.
@@skyviewtrading okay thanks that's what I wanted to know
Is there a debit strangle as well ?
Look for a long strangle.
Hello! There is! It's when you buy a strangle on entry. Or, "long strangle." We personally don't like this approach though. When you buy premium on entry like that you have time decay working against you. You're also betting on an outsized directional move. In our opinion, it's tough to find trading consistency and success with that longer term.
Hi
Hello, thanks for visiting!
I dont get it, if you are selling OTM covered calls while at same time selling OTM puts with cash as collateral why would you lose money? If stock pumps then your shares get called away at higher price than you paid for. While at same time making money on the puts that expired worthless
Hello! I think what you are missing here is that the Strangle strategy does not require you own shares of stock. It's just a short call and a short put. No shares of stock are involved. Instead, we sell an OTM call and sell an OTM put. It makes a neutral bet, and benefits when the stock stays between the two short strikes. Hopefully that makes sense!
@@skyviewtrading Thinkorswim does not allow me to short calls without stock, it says illegal -100 shares. What am I missing?
You absolutely CAN lose money on both sides of the trade
At expiration, you cannot. The stock can't be in more than one place at once.
Occasionally, you could temporarily have unrealized losses on both sides if volatility spikes. But at expiration you cannot lose on both sides.
Is there no risk of assignments
Horrible idea to sell strangles. Max loss unlimited. If anything happens overnight like they drop a bomb on the business or anything and the stock falls like lead and you can't get out of it and now you owe $20,000 what will you think then. Defined risk is the only trades to take period.
I’ve been trying to learn options trading. This series has been a great help.
Thank you
We love to hear that, thanks for watching!
I just finished up your beginner course and the trading strategies ones. I need to say thank you, at first it is very intimidating seeing all these things but getting it picked apart and taught to you is amazing. Made my first 300 dollars using a covered call. thank you.
We're so glad to hear we are helping. Keep up the hard work and thanks for the kind words!
Amazing explaination! Really wish you were my teacher in school.
Thanks so much for the kind words and for watching! =]
Thanks for the video. I don’t see the link for the 3 free lessons; especially the one on volatility
Hello! We are referring to this training here! skyviewtrading.com/training/?el=youtubeorganic_training_strangle
It would be helpful to give users perspective on what IF scenario if stock goes up or down by significant %.
Users read this info -
Let's say your SELL CALL strike is 85 and stock rockted to 100 then you should either close the option or purchase 100 shares @ 100 and you're liable to sell it for $85/stock, resulting in $1,500 loss.
On other hand, lets says, you've sold Put for 65 strike and stock tanks to 50/share, you'll be required to purchase 100 shares @$65, resulting in $1500 loss.
Thanks for the feedback! We will look to create some more videos on what-if scenarios!
yes this is a very risky strategy, guess that is why the iron condor helps to limit risk
My understanding is that a Strangle is a "naked" trade and therefore can't be traded out of an IRA. Is this correct? And an Iron Condor is just a hedged strangle, right?
Hello! You are correct! Iron Condors are the defined-risk version of strangles. Most brokers do not allow you to trade naked premium (strangles) in an IRA account. However, TastyTrade does! You just need a 25k minimum, and the margin requirements are a bit larger compared with a margin account.
U have very informative videos thanks
Glad you like them!
how much capital will strangle need?
It depends on a few factors and each brokerage firm may have their own calculations for determining the margin requirement, although most will be pretty close. It will vary quite a bit between different underlyings.
You can see the example at 7:33 in the video. The buying power effect (capital requirement) is -$1,301, with a maximum profit potential of $369. Potential return on capital of 28.4%. Going further out of the money with the strike selection will lower the maximum profit potential, but it will also reduce the capital requirement.
Last thing to note with strangles (or any undefined risk spreads), is that margin requirements can (and will) fluctuate during the life of the trade. For this reason, we teach our members implementing this strategy to leave some "cushion" of capital to account for this.
Thank you for the comment. Hope that helps!
Thank you! Your videos are very helpful, especially for beginners ❤
We love to hear that, and thank you for watching! =]
Extremely well explained.
Thanks so much for the kind words, and for watching!
Hold up, if options can be exercised at any point before expiration, doesn't that mean you can TOTALLY lose money on BOTH of them if the price hits both strikes before expiration???
I'd love to see skyviews take on the wheel strategy
😏
I accept that the probability of early assignment on either short option is very low, but the severity could be very high (I think of risk as being the product of Probability x Severity) without any offsetting long options, especially for small accounts. When sizing the trade do you recommend ensuring that you have enough capital on-hand to respond to an early assignment on either short option? It seems the change in buying power is only a small part of gauging readiness for this strategy with naked short options.
Early assignment is hardly a risk at all. More of just a nuisance, if anything. If you are early assigned, you can simply just close the stock (and even simultaneously re-open the option if you want and it's like it never happened, minus assignment fees of course, which nowadays are almost non-existent).
Proper position sizing is very important, but more so for fluctuating margin requirements and just managing your risk in general. Early assignment is the least of our worries.
Early assignment also typically only happens if there is zero extrinsic value left on the option (which means the short option is deep in-the-money and would act like stock anyways), and also only very close to expiration. But again, if it happens, you can just close the position. It's not like you lose money because of it as the short option would already be acting as stock anyways.
With our style of trading, we pretty much would always adjust or close the position long before early assignment would ever be likely to happen, anyways.
Hope that helps!
@@skyviewtrading I see. Thank you. So a broker could be very cross with a client immediately following an early assignment, possibly manifesting as a Margin Call, but it is easy to get back into good graces by just quickly closing the long- or short-stock position resulting from the assignment, within the timing requirements of the Margin Call.
Which program you use for the video? Its amazing
Looks like ThinkorSwim
Thaks for the kind words! That is the ThinkOrSwim trading platform by TD Ameritrade.
Nice video.
Thank you! Glad you enjoyed it.
How about long strangle bro ?! Waiting !
Glad I found you guys. This looks like smart strategy and explained well.
We're glad to hear it helped! And it's real cool to see you digging through all our videos. Keep up the hard work!!
@@skyviewtrading yeah I just signed up for the diamond trade account lol. Going through the intro now! Looking to make some trades this week.
Thanks for the great videos!
Question: can't I just buy an out of the money call and out of the money put with say a week or two to expiration and then just close when the stock moves into the money on one side or the other?
Hello! Thanks for watching! As for your question -- I think you meant to say "SELL" an OTM call/put. In this video we were selling a strangle, which means selling an OTM call and selling an OTM put at the same time.
You could sell OTM puts/calls/strangles and close them before they become ITM, however you will likely be down money assuming that the stock made an aggressive move towards your short strike. You could be sitting on a "short term loser" that needs more time decay (days passing) before the P/L starts to look a little bit better for you.
Hopefully that makes sense!
In most if not all of your examples, the stock price either stays within the strike price range or pierces one of those values.
What happens when the stock price pierces one of those values and then retreats back within the range before the expiration date?
Is this something that the trader should manage in some manner? I am sure this happens so how would you respond to this scenario?
Thanks for making these videos. The information is appreciated.
You either get assigned or nothing happens. Assignment is randomized. There's a risk both your call and your put get assigned in a supervolatile market.
great question, i wanna know too. From what i understand, it doesn't matter if it goes out of the range - only thing that mattters is when you sell it. If you sell the option when one of the prices is out of the range, you lose money depending on how far away it is. If you sell it once it comes back, you earn money.
Please explain if stock rockets to 94 on day 15, and option is claimed, so you lose, then stock tanks to 60 on day 25, and claimed, so you lose again, right?
Hello! We would only lose money if the price of the stock expires beyond our short strikes (and break-evens specifically) on the expiration date. Hopefully that makes sense!
Wouldnt the risk be infinate on the upside? Pretty sure no broker would let you just short a call without owning shares.
Hello! Yes the max loss is technically "infinite" on the call side because the stock could go to "infinity." In reality neither of those are going to happen, and as option sellers we can find ways to put real numbers and probabilities on what the loss would look like if X happened in the market.
As for the brokers, yes they actually do let you sell calls or strangles or any naked premium trade without owning shares of stock. All brokers that I know of, though you might need to have special trading approval levels in your account.
For example, TastyTrade is our preferred broker. The approval process is simple, and we trade a lot of strangles with them without owning shares of stock! Some other popular ones in our community are TD Ameritrade and Interactive Brokers. I hope that helps!
Awesome video!
Glad you enjoyed it!
You are an Amazing guy! thank you so much for all the effort. this kind of course must be worth thousands of dollars! and you even reply to all of the comments? what are you? big hug from Regev, 26, Israel.
We're so glad to hear you are enjoying our content. Thanks for the kind words and for watching!
Can we achieve this with LONG BUY and SHORT BUY in other wordss CE BUY and PE BUY? Please confirm.
Hello! I'm not too sure what you are asking here. Maybe you can ask your question in a different way?
@@skyviewtrading - CALL BUY and PUT BUY as a strangle combo
Does this mean that as the option contract nears the exp days, we will gain value since the contract has time decays?
so basically we gain profit as time decays as long as the stock prices are in the strike prices in the range?
That's exactly correct -- nice job!
I’m confused. What is the benefit when Max profit is 369 but cost of trade is 367?
Hello! Every trade has a buying power requirement. Let's say for this trade it's $1,000. That's how much the broker wants us to have in our account to control the trade. The trade also has a max profit, let's call that $367. Once we close the trade we will realize the profit or loss of the trade and we will also get our buying power requirement back, which in this example we assumed was $1,000. Hopefully that makes sense!
I'm interested in trading with sell put can you send me tips to achieve my goal
Keep digging through our channel and maybe even think about joining our membership!
Do you always hold until expiration ?
Nope! In fact, we very rarely hold until expiration. We're always taking profits off the table early.
I have been trying different trading strategy and the one at the moment I feel the most comfortable, is to own 100 share of the underlying stock. Sell ATM short call contract. Wait for a nice entry for the Short Put side, and simultaneously buying the Put and Call to form a iron butterfly or condor. The huge net credit you create guarantee a higher expected return. Even if you never find a nice entry for the Put side or the stock price skyrocketed, you still profited as a simple covered call. What do you think about this strategy.❤
I am currently using this strategy on Bank of America (BAC). Because the stock price is trading at almost 6 year low ( exclude the pandemic selloff). Holding the underlying stock will be a value investment long term. The 30% drop from the collapse of regional banks seemed to have cost a panic oversell, and have little impacts on larger banks.
Hey! It's not really our style as there are a lot of moving parts and we also like to stay on the naked premium side of things for the most part as they have many advantages over defined-risk. But we're glad to hear it's been working for you!
Can not we do any adjustment to this strategy?
Yes, there are adjustment mechanics we have in place if the trade goes against us!
More videos please , really enjoy your teaching style
Thanks so much for watching, and for the kind words! More to come for sure! If you want to get more in-depth though, check out our website where we have more detailed training for paying members.
Please make
Please make what!?
Is it possible to close it earlier rather than waiting to Dte to ensure we are in profits?
Yes, for sure! We actually like to close our winning trades before expiration as well.
@@skyviewtrading some said it is best to sell or buy options during IV High, however, high IV implies shares my dropping so much and its a risk. We couldn't monitor the trades every second.
Good morning question about the strangle trade is this legal? Selling calls and puts legal?
Hello! YES! It is of course legal haha. Most reputable brokers will have trading platforms that recognize the trading strategy "strangle." Hopefully that helps!
Every video SkyView puts out.... Priceless
🫰😎
Thanks so much! Glad you enjoy them! More to come 👍🏼