A savvy, experienced investor has a money making plan for any condition in the stock market. Whether the market is stable or volatile, whether it is bullish or bearish, there is a method for finding a profit. Such is the case with a sell strangle which is a neutral options trading strategy. This technique requires the investor to sell a call option that is out-of-the-money as well as a put option that is also out-of-the-money. Both the call option and the put option need to be on the same stock with the same expiration date. This strategy is very similar to a sell straddle but with a sell strangle, the strike prices are not the same.
A sell strangle is made when the market has experienced a substantial upward move and your expectation is for consolidation. In this case, the possible results are a known, limited gain or unlimited risk. A sell strangle isn’t a move for the beginner investing in the stock market since the risk to reward ratio is not positive and extreme care with this maneuver is required.
The gain in a sell strangle is only the premium that is received for selling the call option and the put option. Remember, as with any stock transaction, your profit is reduced by any commissions. Done as a response to a dramatic upward move that has occurred, the investor is expecting the market to experience a consolidation and absorb its gains before moving again. Since the market is filled with extreme stock volatility, the cost of the Call and Put Options will tend to be very high. When the market does consolidate, volatility will decrease and lower the price of the options, allowing the investor to buy back the options at a lower price to close the position. With a Sell Strangle, the concept of time decay also works to the advantage of the investor. While this is a somewhat complex transaction, a sell strangle is an excellent stock option trading strategy for an experienced trader.
A sell strangle requires that the investor monitor the position for unfavorable movement and, if necessary, buy back one of the options if there is any indication that the market will resume its trend or reverse direction. If there is an indication that the market will resume its upward trend, the trader should buy back the call. If the market appears to be headed down then the trader should buy back the put.
It is important that the trader do stock market technical analysis prior to implementing this strategy. The powerful charting capabilities of this stock investing system will offer insight into movements in the market before attempting to enter a sell strangle. By using a trading system like Japanese Candlesticks, a trader can not only identify the mood of the market, but he or she can identify a stock that is a candidate for a trade like a sell strangle.
While a Sell Strangle is not advisable for everyone, it is one of several investment options that can create profits for a skilled trader. Using a tested stock trading plan, good technical analysis tools, and a system such as Japanese Candlesticks, a trader will find this method to be something that not only creates a profit, but adds another weapon to the arsenal.
There are many options trading strategies in addition to selling covered calls that you should learn including the bear call spread, the bear put spread and the put hedge, just to name few.
