This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Strangle This Trading Range

But if the market is able to calm down, consolidate over the next two weeks and still trade between 1220 and 1240 as of Dec. 1, or two weeks from today, you can expect time decay to bring the 1220/1250 strangle's value down from $18 to approximately $10 during those 14 trading days. That's a 44% reduction in value, which translates into a 28% return on investment (standard margin rules applied).

If this type of profit is available at that time, I would suggest closing out the position. Trying to carry a naked option position all the way to expiration increases the risk, without a commensurate increase in the potential reward.

Limiting the Risk

Naked selling of straddles and strangles comes with unlimited risk; it should be done on short-term trades, not as part of an ongoing rolling position. So if you do want to play the premium collection game, I would suggest employing a condor strategy.

A condor consists of four strikes (a reasonable commission structure and efficient execution platform are prerequisites) that can be described most simply as having both a vertical call spread and a vertical put spread. Using the example above, one might sell the 1220/1200 put spread for a net credit of $5 and sell the 1250/1270 call spread for net credit of $5, which gives the iron condor a net credit and maximum profit if $10.

Note, however, that the maximum risk is also $10, the premium collected plus the difference between the long and short strikes (1220-1200 +10 or 1270-1250 +10).

Because the condor has limited risk, it can be used to cover a wider range and held for a longer period of time. Again, it might be prudent to close out the position before expiration rather then trying to squeeze out every last nickel of time decay. The longer you remain short options, the greater the likelihood something can go wrong.
Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SPY $206.33 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs