Mar 25

Written by:
3/25/2008 10:48 AM 

Sell a Strangle Close to Expiration

    There’s always risk when you buy any investment and there’s even more risk when you sell short an investment. Add in options and you’re looking at a very risky proposition. With that warning, selling a combination of a Call and a Put within days of expiration is a good way to make money while limiting your risk.

    Your broker will have to approve your account for the blind selling of options which is not an immediate setting and requires additional paperwork. In addition, you should select investments that are liquid (a lot of options volume) in which the underlying asset does not have a high beta, does not move with wild swings day-to-day.

    This month I picked the SPDRs (SPY) with the March 140 Call and the March 129 Put. A Strangle itself limits your risk exposure because you are both long and short the same asset at the same time. But selling both the Call and the Put also kicks in the time value of the options which is decreasing rapidly as the expiration approaches. This is a one day trade and as soon as a 20% gain is made, I would be looking to close the position.