Monthly Cash Machine: Powerful Strategies for Selling Options in Bull and Bear Markets by Kratter Matthew R

Author:Kratter, Matthew R. [Kratter, Matthew R.]
Language: eng
Format: azw3
Tags: investing, money, stocks, trading, cash
Publisher: Trader University
Published: 2016-04-23T04:00:00+00:00

Chapter 4: Selling Spreads for Profits

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If you have a strong opinion that a stock is going to go up or down, you should not be trading iron condors.

Rather, if you think that the stock is going to rally (or do nothing and just sit there), you should sell just the lower part of the iron condor: the put spread.

If you think that the stock is going to go down (or do nothing and just sit there), you should sell just the upper part of the iron condor: the call spread.

Due to the long-term natural upward bias of the stock market, I usually prefer to sell put spreads rather than call spreads.

Take Coca Cola (KO), for example. Today is April 13, 2016. The stock is currently trading at 45.92, and pays a 3% dividend yield at that price.

I believe that the stock will trade at or above 45.00 for the next 60 days.

Note that I don’t need to believe that the stock will go up a lot from here, in order to make money.

And even if KO goes down a little or a lot from here, as we shall see, there are sneaky ways to “repair” the trade.

So I take a look at the June 2016 put options, which are about 60 days out from expiration:

http://finance.yahoo.com/q/op?s=KO

Today I can sell the KO 45.00 puts to the bid at 0.94. If I sell 10 puts, I will pocket $940 before commissions (10*100*0.94 equals $940).

I can then buy the KO 43.00 puts from the ask at 0.45. If I buy 10 puts, I will have to pay $450 before commissions (10*100* 0.45 equals $450).

I will be receiving $940 and paying $450, so I will receive a net credit of $490 to my account. After commissions, call it $470.

I have just sold the 43/45 put spread and pocketed $470.

Now let’s see what happens when we are at the June 2016 options expiration.

If KO is trading above 45, the long 43.00 put will expire worthless (I paid $460 including a $10 commission for it), and I will get to keep the full premium from the short 45.00 put ($930 after a $10 commission), which will also expire worthless. My put spread monthly cash machine has just made me $470 after commissions.

What if KO is trading lower at expiration?

If KO is trading at 43.00, the long 43.00 put will expire worthless (so I’m out the $460 that I paid for it). Unfortunately the short 45.00 put will now be worth 2.00 (45-43). I sold it at .94 and it is now worth 2.00, so I have lost 1.06 per contract or a total amount of $1,060 (10*100*1.06), or $1,070 including a $10 commission.

So if KO trades at 43.00 at expiration, I will have lost $1,530 ($460 plus $1,070)

What happens if KO goes to zero? It’s extremely unlikely, but it’s the worst case scenario, so we should consider it.

My 10 long 43.00 puts will be worth $43,000 (10*100*43). My 10 short 45.00 puts will be worth – $45,000 (10*100*45).

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