We've mentioned before that our preference is to close out short option positions before the dynamics of expiration week have a chance to kick in. In a nutshell, while it's true that theta declines more quickly as expiration looms, tempting option shorts to hold on as long as possible, it is also true that gamma rises more quickly closer to expiration...
In this article I argue that naked put selling, when the volatility is at extreme levels, would provide the seller with a "juicy" premium. At the same time the exposure would be technically unlimited (though the price could only go down to zero) while the reward would be limited to the premium received. Nonetheless, the safer way of trading would be by using spread trading or the simultaneous selling and buying of option premium.
In my previous article, I.C. Explained, I described a textbook example of an Iron Condor. In this article, I will pick up where I left off, and focus on defining the main difference between the I.C. (Iron Condor) and Condor Spreads...
In this week's article, I will go over one of my Iron Condors that I did awhile ago. (Honestly, in my humble opinion, the last part of 2008 was not the correct environment for the Iron Condor strategy. The I.C. is a strategy that works well in sideways markets. In the last half of 2008, we had a "trending" market, and every owner of a 401K or an IRA account knows which direction the equity market was trending: a way South – deep South.) Let us define an I.C. as a complex spread trade used in the directionless market environment. More specifically, an I.C. is an option strategy composed of two vertical credit spreads, namely a Bear Call and a Bull Put.
For an options trader, one of the most remarkable aspects of the 2008 financial crisis was that it featured months in which many options closed in or near the money when, even weeks before, they were deep out-of-the-money (DOTM) and "worthless." The lesson is that ostensibly overpriced options are totally devoid of value, until they aren't...
In light of the insane volatility in the markets recently, I thought this week it might be helpful to cover a potential strategy on very volatile stocks: Upside-Down Split-Strikes
With the "diagonal backspread," you buy longer-term options and sell a lesser number of nearer-term options that are more in-the-money. Diagonal backspread opportunities often exist in volatile, relatively high premium markets, such as we have been experiencing. With the call diagonal backspread, you can take advantage of the fact that in nervous markets, the nearer-term lower-strike options become steeply overpriced, while the longer-term higher-strike options tend to remain fairly priced.
In this article, I will give an example of placing two different types of bearish strategies with two different expiration months on the same underlying. Once again I am advocating for being a Net Premium Seller...
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