Lou,
you could as well combine the 2 plays, meaning to finance some straddles with the profits of the IC', which is some kind of insurance if you like,
gis
On Fri, Jun 11, 2010 at 1:19 PM, Louis <loupi3@yahoo.com > wrote:
I'm assuming from your options that the hypothetical underlying was in the mid 40's and that it rose substantially, roughly about 40+%, a relatively unusual event. Your loss as others have pointed out is $900 for one contract.
I,ve been studyung options and although I have a lot to learn, it seems to me that iron condors, which seem to be a favorite of many, can be treacherous and require a lot of management. The risk is always much greater than the reward as you can see from this example.
Lately I've been looking at straddles (I hope I have the terminology right), which have a narrower profit band than IC's but limit your loss to the premium paid and have essentially unlimited profit both on the downside and the upside.
Using your example, though it's admittedly an unusual case, and assuming the underlying was at 45, you would have bought a long OTM or ATM call and a long OTM or ATM put. Your cost for one contract would have been in the area of $200-250, maybe less.
If your call option had been, say, 45, you would have made $1900 less your premium and your put would expire worthless. If the stock went down instead of up, results would have been equally good.
Anybody else have any ideas about this method?
It requires a significant price move to make it work, but I'm thinking that its low risk and unlimited profit potential might make it a very effective tool to use with high volatility stocks.
Any opinions?
Lou
--- In OptionClub@yahoogroups.com , "paul7313" <paul7313@...> wrote:
>
> I sell an IC; 1 contract; sell 50 and buy 60 call, and sell 40 and buy 30 put. both give me a credit of 1. when the options expire, the stock is 64
>
> the call is worth -100, the put is worth 100. total 0
>
>
>
>
> or the IC is worth 200 minus the 100 call= 100 total
>
>
> I want to get this right before I risk real money
>
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