This is working for me quite well: the market is not going anywhere.
How can you make money in such environment?
The risk is always there, which is why selling options (insurance) is always going to allow options traders to make money.
If the market doesn't go anywhere then we just keep the premium that we collected.
However, in these sorts of environment the volatility tends to be low, which means greater risk for options sellers.
That's because when something disrupts the market then the volatility and option prices jump up so our short position could suffer greatly.
For this reason, it's very important to always have sufficient level of backup capital.
For those, who are new to my daily market comments, I place and document one trade a day with the objective of helping everyone learn how to trade options.
What's my trade for today?
I am testing an interesting strategy on #SQ (#Block). I am betting on the price to remain between $55 and $85 over the next 38 days, but reducing my exposure by buying the same strangle expiring a week later after earnings.
Sold: Feb 17 $55p/85c for $2.73 credit.
Buy: Feb 24 $55p/85c for $4.23 debit.
Cost: $1.50 (debit).
How does it work?
If the share price remains between $55 and $90 by the Feb expiration then we can keep the $2.73 premium that we collect for this trade.
Because the Feb 24 expiration is after the earnings we can rightfully assume that the option prices will remain elevated so we will be able to close our long positions for a loss that is less than the gain on the short positions.
So the $1.50 invested could generate substantial profit.
What's the risk?
Only $1.50 or $150. That's it. Because if the price moves outside of our range then we will be protected by our long position. In fact, we can reduce the cost basis by rolling.
Trade Type: Custom
Strike: $Short Feb 17 $55/85; Long Feb 24 $55/85
Expiry: 17 Feb
IV Rank: 16.7
Cap Req: $150
Annualised Prof at Expiration: ?
IMPORTANT: Studying previous trades provide the opportunity to everyone to learn a great deal so I encourage you to click on the links below and digest the info.