Strangle This Trading Range

I'd strongly encourage the use of limit orders on these, in this case using both pieces together rather then legging in when trying to establish a position. If you don't get filled at your price, forget about it.

Straddles Can Leave You Without a Paddle

Some folks might be willing to step up and sell some nearer-term options, namely November options that expire this Friday, in order to capture the acceleration of time decay as expiration nears. This likely would involve selling a straddle, which is being short both puts and calls with the same strike price. A straddle increases the position's potential risk disproportionately to the increase in the maximum potential profit.

For this reason, I suggest selling a strangle rather than a straddle (the November 1230 straddle can be sold for approximately $7.20 total credit) because at-the-money options retain the most time premium. This means they will be worth something right up until expiration and they carry assignment risk, as it is likely one side will expire in the money. It's better to sell slightly out-of-the-money options, which have a higher theta, on short-dated options -- especially if break-even points or the range in which the position can produce a profit can be expanded.

Our strangle position has break-even points of 1202 and 1268 on the S&P (the total premium collected plus the call strike and minus the put strike, respectively), representing a range of 66 points, or 5.3%, at current levels. Through the first 10 months of this year, the S&P has stayed within a 6% range during any four-week period, so we have statistics on our side. But beware, this position does carry substantial risk. All it takes is one terror event or even a false alarm to send stocks reeling -- and you scrambling for cover.