Strangles: Part Two

TWO MORE EXAMPLES I’m going to show two more trades, an expensive one, AAPL, and an inexpensive one, INTC, and explain a few more things.

Let’s do the wild one first. Netflix (NFLX) is doing well. They are expanding and taking on new subscribers at a breath-taking pace. The stock is currently at $98.25. It’s near the end of the quarter, meaning that it will be making its new earnings numbers and subscriber counts soon.

The next month call options are $7.25 X $7.35. Do you see the built in fluff?—the volatility, the speculation in this premium. The $95 put is $5.95 X $6.10. Which way do you think it will move. Again, I’d vote to the upside. But if I didn’t have a bias, I’d do a Strangle.

Let’s just do one contract. That would be $735 for the calls and $610 for the puts. Total: $1,345. Again, I’d set the wind-out price at a double and be prepared to adjust that.

 

Netflix just did a 7:1 stock split. It’s a good one to watch. Also, you may want to look up the current prices, figure out the options and paper-trade it. It’s good to build confidence.

Intel, (INTC): Let’s now look at another trade. It will be on a stock with a lot less volatility. The stock price today (a snapshot in time) was $28.90. The $29 all is 87¢ X 88¢. Notice the 1¢ difference in the spread. This tells you that this stock is solid, also meaning it’s not going anywhere fast.

The $29 puts are $1.04 X $1.05. These two, the calls and puts, would be the prices for a Straddle.

But let’s move the hands further from the neck, and do a Strangle. The $30 calls are 42¢ X 43¢. The puts at the $28 strike price are 64¢ X 66¢. Look at the low cost. Wow, we can do this. But should we? Cheap does not mean good. We’ll deal with that question on the other side of this chart on Intel. This is for one year.

So, what do you see here? Look closely at the lines on the chart. Each horizontal line is two dollars. So, all-in-all, that’s almost a rolling stock. But what now? I don’t know. I’ll default to the old stand-by: MORE OF THE SAME. This means this stock is not a prime candidate for a straddle or a Strangle. There is just not enough movement.

SUMMARY

For years I’ve tried to make Strangles work. I’m okay at it, but usually upon further study, I get a bias in my mind for the stock to the either move to the upside or to the downside.

The numbers have to add up, but even when the numbers look good, you put market forces to work against you. This is not where we want to be. Market forces—especially the deterioration of time—are too powerful.

Before you put your money in harm’s way, practice, practice and then practice some more.

 

 

 

Stock MarketWade Cook