Dear trading community,
I great way to get (and keep short deltas) as a core position in a low IV environment is a covered put.
Sell 100 shares of stock and sell the 30 delta put against it.
Just like in the example below.
Covered Put
(short 100 shares of stock + short 30 delta put)
Keep rolling the put every month around 21 DTE (to the 30 delta in the back month) in order to lower your basis.
When IV spikes, it is a good idea to replace your short stock position (=100 static short deltas) with two short atm calls (=100 dynamic short deltas).
Let me show you an example to clarify, why this is a good idea.
Synthetic Covered Put
(short two atm calls + short 30 delta put)
Advantages:
- much lower buying power reduction
- higher break even to the upside
- over three times the daily theta decay
- higher max profit
Disadvantages:
- risk to the downside
- short deltas can grow above 100 during a sharp rise in the stock price
In my opinion, it is definitely a good idea to replace your short stock position with two short atm calls, but it is only worth to do it in high IV.
In low IV you aren't getting paid enough for the additional risk.
If you want to learn more about options trading, please check out my books:
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The first book is still available for a huge discount on Google Play, so buy as long as it is still cheap.
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Thanks to all my readers for buying it.
If you like it, you would do me a great favor by writing a short review on amazon.
My second book is available for $5.99 on Amazon, Google and on Apple.
Thanks to all my readers for buying it.
If you like it, you would do me a great favor by writing a short review on amazon.
My third book is available on Amazon, Google and iTunes.
Have a great weekend,
Stephan Haller
Legal disclaimer: These are not trade recommendations. Options involve risk and are not suitable for all investors. The trades shown above are for educational purpose only.