Making Money While You Sleep with Short Strangles

Read about these short strangles trades I placed in June 2018:  Featured trades in my newsletter.

On the chart, you can see gold prices haven’t varied (high -low) but about $132 in almost a full year.  This CALL with the 1700-strike is $428 Out-of-the-Money (OTM).  The 1050 PUT strike is $238 OTM.  Either of these strikes has about a 98% chance of expiring worthless (OTM).   That is a 98% chance of expiring OTM, “Prob OTM.”

“Prob OTM” = the mathematical probability the option will expire Out-of-The-Money on it’s expiration date. If you can get this parameter on your trading option matrix, you can use this “rule of thumb” to compute it; it is fairly accurate. Prob OTM = (1 – delta). Example: the delta of the 1700 DEC18 gold CALL is 0.02, thus (1.0 – .02) *100 = 98%

I think of a trade like this as me being one of two things:  My own casino or my own insurance company.  Consistently finding and placing short strangles is one of my daily duties as a commodity option seller.  I am writing these words on 26 JUNE 2018.  Another short strangle I have in placed earlier month is:  Short the $90 a barrel crude oil CALL and short the $45 a barrel PUT.  The underlying is the December 2018 Crude Oil futures.  I got paid (collected the option premium, aka: received a credit) about $300 for this trade.  If Crude Oil prices are between $90 and $45 the third week of NOV18 when the options expire, I get to keep the money.

In the last 10 months, I have had short Gold strangles – and every one of them has made a profit.  This is a trade I have used for years to collect option premium.  Here is a link to a similar trade I did in FEB 2018  

I just adjust the strikes on the CALL and PUT and re-use this strategy again and again.  They can be layered out in time, so expiration dates are staggered over several months for income.  This is one of the techniques I teach to readers of my newsletter.

Are these trades risky?  Could I lose money, a lot of money?  The answer is YES.  But mine is a calculated risk.  I have a firm money management rule.  Even though I rarely have a loss, it happens to me just like it happens to all traders; this key to surviving losses is the same as it is for trading: They must be managed.  If this oil strangle’s premium turns against me and doubles to $600 or more, I will exit the trade.  This means I forfeit the $300 credit and lose another $300, so my NET loss is $300.  The options are very far OTM and the probability is 98% I’ll be ok.   My record is much better, but if I only lose one of every ten trades,  I will continue to be paid very well for my trading strategies.  A casino or insurance company has payouts to make, but they collect way more than they pay out and are two of the most profitable type businesses anywhere.  I strive to be like they are: profitable.  Of course I never place a trade thinking I will lose, but I also know that nobody (except liars) has 100% winners.  Do I have to avoid RISK?  As much as possible, YES.

If you are not familiar with this kind of trading, I should point out that I only hold a few of these trades until the expiration date.  Often, I will get out early with a profit.  I believe in taking a nice profit and not pushing my luck.  Trying to get the last few dollars out of a trade like this, can result in giving up the gains you already have available.  In my newsletter and blog, I discuss early profit-taking, getting out of bad trades before they become terrible, and ways to measure the risk/reward of a trade in progress.

You should know not to take this kind of trading lightly.  If you don’t know what you are doing, you can pile up losses and it can happen very, very fast.  Without firm money-management rules, this type of trading doesn’t work and can easily end very badly. These strategies have been used by professional for years- and now the powerful, free on-line software of most brokers and the very discounted commission rates available, you can learn how to be successful with such trades.  Since broadband is everywhere and the software is free from your broker – the stock market isn’t the only game in town for personal investors.  Five or ten years ago, this was not practical.  As far as I know, I have the only subscriber-based newsletter that teaches small and medium sized investors to create income using the “selling commodity options” strategies.  I am not a broker, nor do I manage money for others.  I have been a trader, writer, and educator for over 25 years associated with commodity trading, commercial hedging, and now specializing in selling commodity options –  something to consider if you like the idea of making money while you sleep. Get three months of the most recent issues plus two months of live real-time issues for the next two months.  Sign up for free trial of the Option Income Training Bulletin FREE OFFER.

Don A. Singletary

The commentary and examples are for teaching purposes only and are not intended to be a trading or trade advisory service. Any investments, trades, and/or speculations made in light of  the ideas, opinions, and/or forecasts, expressed or implied herein on the web site and/or newsletter, are committed at your own risk, financial or otherwise. Trading with leverage could lead to greater loss than your initial deposit. Trade at your own risk.   Investors and traders are responsible for their own investment/trading decisions including entries, exits, position, sizing and  use of stops or lack thereof.  This is not a trade advisory service and is for educational purposes only.

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