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If we consider Long Straddle is the buying strategy
then Short Strangle is the selling strategy before earning
report. This strategy will take advantage of volatility collapse and time
decay. However, this strategy needs more margin requirement in our broker
account and it will not work if the stock moves EXTREMELY BIG after
earning report. This is just the opposite of the Long Straddle strategy.
Leg One: sell to open a short call option. (This call option should be
out-of-the-money and above resistance.)
Leg Two: sell to open a short put option. (This put option should be
out-of-the-money and below support.)
Max. Profit = Net Credit. Max. profit
will occur if the stock remains within the limited trading range between
the 2 strike prices.
Loss: In theory, the loss can be unlimited. Loss will occur if the
stock rises above the strike price of the call option or dips below the
strike price of the put option.
Main points:
·
This strategy will take advantage of
volatility collapse. Since we are option seller, we want the option
prices to decrease after we enter the trade.
·
This strategy will also work without earning
report factor as long as we identify a flat trending stock with clear
support and resistance.
Notice: This strategy is simply a combination of selling out-of-the-money
short call and short put.
Personal note: Personally, when I trade this strategy, I pick
the stock with high volatility. When choosing the strike prices to sell
my naked call and put, I pick the strike prices with 85% to 95%
probability of staying out-of-the-money for a higher chance of profitable
trade. With high volatility stock, we can still find decent option
premium even if we pick the strike prices pretty far away from the stock
price.
Dennis Phan 潘家墉
24 November 2012
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