Option strategy sell call and sell put


A short straddle gives you the obligation to sell the stock at strike price A and the obligation to buy the stock at strike price A if the options are assigned. By selling two options, you significantly increase the income you would have achieved from selling a put or a call alone.

But that comes at a cost. You have unlimited risk on the upside and substantial downside risk. Advanced traders might run this strategy to take advantage of a possible decrease in implied volatility. If implied option strategy sell call and sell put is abnormally high for no apparent reason, the call and put may be overvalued. After the sale, the idea is to wait for volatility to drop and close the position at a profit. This strategy is only suited for the most advanced traders and not for the faint of heart.

Short straddles are mainly for market professionals who watch their account option strategy sell call and sell put. In other words, this is not a trade you manage from the golf course. In fact, you should be darn certain that the stock will stick close to strike A. You want the stock exactly at strike A at expiration, so the options expire worthless.

Good luck with that. If the stock goes down, your losses may be substantial but limited to the strike price minus net credit received for selling the straddle. Margin requirement is the short call or short put requirement whichever is greatplus the premium received from the other side.

The net credit received from establishing the short straddle may be applied option strategy sell call and sell put the initial margin requirement. After this position is established, an ongoing maintenance margin requirement may apply.

That means depending on how the underlying performs, an increase or decrease in the required margin is possible. Keep in mind this requirement is subject to change and is on a per-unit basis. For this strategy, time decay is your best friend. It works doubly in your favor, eroding the price of both options you sold.

That means option strategy sell call and sell put you choose to close your position prior to expiration, it will be less expensive to buy it back.

After the strategy is established, you really want implied volatility to decrease. An increase in implied volatility is dangerous because it works doubly against you by increasing the price of both options you sold. That means if you wish to close your position prior to expiration, it will be more expensive to buy back those options. An increase in implied volatility also suggests an increased possibility of a price swing, whereas you want the stock price to remain stable around strike A.

Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied option strategy sell call and sell put represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.

There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees option strategy sell call and sell put future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. The Strategy A short straddle gives you the obligation to sell the stock at option strategy sell call and sell put price A and the obligation to buy the stock at strike price A if the options are assigned. Both options have the same expiration month. Break-even at Expiration There are two break-even points: Strike A minus the net credit received.

Strike A plus the net credit received. The Sweet Spot You want the stock exactly at strike A at expiration, so the options expire worthless. Maximum Potential Profit Potential profit is limited to the net credit received for selling the call and the put. Maximum Potential Loss If the stock goes up, your losses could be theoretically unlimited.

Ally Invest Margin Requirement Margin requirement is the short call or short put requirement whichever is greatplus the premium received from the other side.

As Time Goes By For this strategy, time decay is your best friend. Implied Volatility After the strategy is established, you really want implied volatility to decrease.

A short put spread obligates you to buy the stock at strike price B if option strategy sell call and sell put option is assigned but gives you the right to sell stock at strike price A. A short put spread is an alternative to the short put. One advantage of this strategy is that you want both options to expire worthless. You may wish to consider ensuring that strike B is around one standard deviation out-of-the-money at initiation.

That will increase your probability of success. However, the further out-of-the-money the strike price is, the lower the net credit option strategy sell call and sell put will be from this spread. As a general rule of thumb, you may wish to consider running this strategy approximately days from expiration to take advantage of accelerating time decay as expiration approaches.

Of course, this depends on the underlying stock and market conditions such as implied volatility. You may also be anticipating neutral activity if strike B is out-of-the-money. You want the stock to be at or above strike B at expiration, so both options will expire worthless. The net credit received when establishing the short put spread may be applied to the initial margin requirement. Keep in mind this requirement is option strategy sell call and sell put a per-unit basis.

For this strategy, the net effect of time decay is somewhat positive. It will erode the value of the option you sold good but it will also erode the value of the option you bought bad.

After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices. If your forecast was correct and the stock price is approaching or above strike B, you want implied volatility to decrease.

If your forecast was incorrect and the stock price is approaching or below strike A, you want implied volatility to increase for two reasons.

First, it will increase the value of the near-the-money option you bought faster than the in-the-money option you sold, thereby decreasing the overall value of the spread. Second, it reflects an increased probability of a price swing which will hopefully be to the upside. Options involve risk and are not suitable for all investors.

For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.

Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or option strategy sell call and sell put information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.

Option strategy sell call and sell put Strategy A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A. Options Guy's Tips One advantage of this strategy is that you want both options to expire worthless. Both options have the same expiration month. When to Run It You're bullish. Break-even at Expiration Strike B minus the net credit received when selling the spread.

The Sweet Spot You want the stock to be at or above strike B at expiration, so both options will expire worthless. Maximum Potential Profit Potential profit is limited to the net credit you receive when you set up the strategy. Maximum Potential Loss Risk is limited to the difference between strike A and strike B, minus the net credit received.

Ally Invest Margin Requirement Margin requirement is the difference between the strike prices. As Time Goes By For this strategy, the net effect of time decay is somewhat positive. Implied Volatility After the strategy is established, the effect of implied volatility depends option strategy sell call and sell put where the stock is relative to your strike prices. Use the Technical Analysis Tool to look for bullish indicators.

Use the Probability Calculator to verify that strike B is about one standard deviation out-of-the-money.

Although this is a psychology lesson, its being placed here because it pertains more to Binary Options than it does to general trading. Speaking of which, it builds on content already presented in the psychology lessons of the GT200 series. The primary focus of the 200 series will be on Trading Binary Options using Price Action Techniques. Plus some of the lessons will elaborate on topics discussed within the 100 series.