36 lines
2.5 KiB
Plaintext
36 lines
2.5 KiB
Plaintext
Chapter 20: The Sale of a Straddle 315
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STRANGLE (COMBINATION) WRITING
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Recall that a strangle is any position involving both puts and calls, when there is some
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difference in the terms of the options. Commonly, the puts and calls will have the
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same expiration date but differing striking prices. A strangle write is usually estab
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lished by selling both an out-of-the-money put and an out-of-the-money call with the
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stock approximately centered between the two striking prices. In this way, the naked
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option writer can remain neutral on the outlook for the underlying stock, even when
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the stock is not near a striking price.
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This strategy is quite similar to straddle writing, except that the strangle
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writer makes his maximum profit over a much wider range than the straddle
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writer does. In this or any other naked writing strategy, the most money that the
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strategist can make is the amount of the premium received. The straddle writer
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has only a minute chance of making a profit of the entire straddle premium, since
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the stock would have to be exactly at the striking price at expiration in order for
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both the written put and call to expire worthless. The strangle writer will make his
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maximum profit potential if the stock is anywhere between the two strikes at expi
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ration, because both options will expire worthless in that case. This strategy is
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equivalent to the variable ratio write described previously in Chapter 6 on ratio
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call writing.
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Example: Given the following prices:
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XYZ common, 65;
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XYZ January 70 call, 4; and
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XYZ January 60 put, 3,
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a strangle write would be established by selling the January 70 call and the January
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60 put. IfXYZ is anywhere between 60 and 70 at January expiration, both options will
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expire worthless and the strangle writer will make a profit of 7 points, the amount of
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the original credit taken in. If XYZ is above 70 at expiration, the strategist will have
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to pay something to buy back the call. For example, if XYZ is at 77 at expiration, the
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January 70 call will have to be bought back for 7 points, thereby creating a break-even
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situation. To the downside, if XYZ were at 53 at expiration, the January 60 put would
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have to be bought back for 7 points, thereby defining that as the downside break
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even point. Table 20-3 and Figure 20-3 outline the potential results of this strangle
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write. The profit range in this example is quite wide, extending from 53 on the down
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side to 77 on the upside. With the stock presently at 65, this is a relatively neutral
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position. |