Can I execute a Covered Strangle with Level 3 permission, which involve writing put?

For example: Stock XYZ at $40.04 per share.

Buy 100 shares XYZ at $40.04

Write (Sell) the MAY 42.5 Strike Call @ $3.15

Write (Sell) the MAY 37.5 Strike Put @ $2.10

And how to you do that? Is that a two step execution?  Buy yhe stock first, and then the options?  And what is the trade type for the options?  Combo?

Can I buy (to close) just one of the option, prior to expiration?

 

Perhaps you should work through this trade and gain an understanding of what you will have on when you are long the underlying, short a call, and short a put.

Yes.  I would like to profit from a sideways market.  For the situation that,  I don't mind to increase the holding in the underlying stock should the market decline or decrease their holding should the market rise.

You have to have level 4 permission to short puts, even if you keep them cash secured.

If the the stock trades sideways and ends up between the 2 sold strike prices, you will lose money.  You want the stock to move up or down beyond the strikes.  If you don't have Level 4 yoiu could look at writing a covered call.

Be careful out there.

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-Sean

I think he can do this trade with level 3 trading.  Zecco's help says:
"Level 3 - Level 2 plus the ability to trade Spreads, Long Straddles, Butterflies, Condors, and Covered Combinations."

This is a covered combination so he should be allowed to do it.  However, if you are still not sure, call the trading desk to verify.

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-Sean

SeanK:

If the the stock trades sideways and ends up between the 2 sold strike prices, you will lose money.  You want the stock to move up or down beyond the strikes.  If you don't have Level 4 yoiu could look at writing a covered call.

Be careful out there.

 

Let's take a look at the position and see if Sean is correct.  To summarize, the op paid 40.04 for the stock, sold the 42.50 call and the 37.5 put for a total of 5.25.  So he has a net debit of 34.79 at the inception.  Now we are at expiration and the stock is 40.  The 37.5 put is worthless, the 42.5 call is worthless and the stock is down 4 cents.  So the op has a net gain of 5.21.  Pretty simple, isn't it?

You see, this position is not covered at all.  The reality is that the op is long deltas, short gamma, short vega, and long theta.  The optimum price at expiration is 42.50 or more.

Thank you, sean.  I will ask the trading desk to verify.

 

GfoolG

I've asked about this trade previously, and I was told by the trade desk that level 4 is needed.  I love this trade because of the control of entry price/profit of selling the put to add to the already steady covered call program I have.

Ugg.  I sorry about my mistake here.  You are selling the strangle so the risk profile is opposite of what I said and you own the stock. I was looking at it as though you were buying a strangle without owning the stock.  Sorry about that.

Billy is correct.  You make money if the stock closes above the lower strike and the most money is above 42.50.   You risk profile is that you have a ton of downside risk but have limited upside gain.  Not a very good risk/reward as far as I am concerned.  However, everyone needs to make up their own mind about how they like to trade.

Be careful.

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-Sean

If there's a decent likelyhood of the stock going down and staying down, this is not the strategy to employ.  However, if you need to change the risk profile due to some crazy volatility in the stock, you can simply change from the short put at the bottom of a covered call to a credit put spread.  That will limit the downside and still make you $$.  One of the main virtues to this trading style is that you control both your risk and your reward.  True, you won't participate when that stock triples in price over the course of 3 seconds, but you can lock in a steady 2%-3% profit per month without breaking a sweat or taking too much of a risk at all.  Even a 2% compounded monthly return is ~27% annualized.

It's hard to perform the "greek" analysis on a hypothetical situation in which the options are not priced by the market, but by just slapping a random set of numbers together for arguement's sake.  It doesn't surprise me at all that the position doesn't make sense.  It's hypothetical for Goog's understanding of the process and the strategy.

I had the direction of the greeks figured out by the time I finished reading the original post.  No need to look at the option prices in a position that is as simple as this one is.  Long the underlying, short the 37.5 put, short the 42.5 call.