Basic Training: Covered Strangles/Covered Combo
- What is it? Long stock, covered call, short put. Why do it? Collect more income than a standard covered call or short put. Why not to do it? Increased margin requirement, you will increase your stock position to the downside.
- Example: XYZ trading at $50.
- Option 1 - Sell covered front month 55 strike call for $1 - collect 2% income.
- Option 2 - Sell both front month 55 call and 45 put for $1 each - collect $2 or 4% income. Rinse and repeat.
Note: Call and put should only be sold on strikes where you are comfortable buying/selling the stock.
Listener Mail: Listener questions and comments
- Question from Tony - Mark, love boot camp. I was lucky enough to have a fairly significant weekly put spread position in DIA this week (long puts at 166-167 and short at 161-162.5). I was making good money on Wednesday and ran into a problem. The bid ask spread on my long puts were so wide, I could not close out, roll or adjust the trade. I thought about buying futures contracts to hedge my delta risk and suck out the theta. Is there any other strategy to adjust or hedge a successful trade without getting haircut on the executions? Should I just calculate the extrinsic value add a spread and put in a limit order for the long leg? Is it always harder to close out a spread trade in a volatile market… i.e. if I want to close a spread trade does one person have to want to enter the same trade? Or can the trade go to two counter parties?
- Question from Mukund Ambarge - Hi Team, I had question on theta decay. I understand that delta is in constant flux with every tick move in stock, the delta / gamma changes. IV is in constant flux with buying and selling of options and volume etc. So vega changes with option transactions. But theta decay is the only one which is always in a steady pace i.e. it's not like it will decay quickly today and slowly tomorrow. The question is when the theta decay is really adjusted in the prices of options. Do the theta decay get adjusted at every tick move? Or every hour? If it is adjusted daily. Then when is the theta decay taken out of options. Early morning before start of trading? Or late in the day like last few minutes that whole days theta is taken out? Also I do not know when is weekend theta taken out of prices? Friday early morning or Friday ending or middle of the day? Basically when does market maker run the prices with the model and set the prices? Only once before trading starts or does he keep adjusting every minute/hour/tick based on demand/supply?
