The Wheel? Covered Call? Cash secured put? Here is the options trading strategy that benefits from them all: Covered Strangle.
Retail trader Lance Kaminsky from San Antonio, Texas has made 75% so far this year (November 2024) on trading Covered Strangle.
He sat down with Theta Profits to explain the strategy and how he trades it.
Watch the video about Covered Strangle here
The video was produced with Streamyard – an easy-to-use and smart tool for live streaming and recording.
Covered Strangle explained
I recommend you watch the video interview with Lance Kaminsky to get an in-depth picture.
But let’s briefly explain what the strategy is:
The covered strangle involves holding 100 shares of a stock (or ETF) and simultaneously selling a call and a put option on that stock. The strategy has two key components:
– Cash-secured put: Selling a put option with cash reserved in case the stock price drops. If the price declines, the put option may be exercised, leading to an additional 100 shares purchased at the strike price.
– Covered call: Selling a call option on the shares you own. This allows you to collect a premium and offsets some downside risk if the stock doesn’t rise significantly.
The following graph shows the risk profile of an example with Apple stocks as the underlying. The trader is long 100 shares at 100$ and has collected 252$ selling both a call and a put one month ahead. The max profit is 1252 dollars and the max loss 43,248 dollars.
Why such a huge max loss? Because the worst-case scenario is that the price of the Apple shares goes to zero. Most traders would agree that this is not a very likely scenario.
How Lance sets up his trades
Lance Kaminsky starts with buying 100 shares of the stock.
He then sells a call on the same stock – typically about one month out with a delta between 10 and 20. However, he points out that you can also sell an in-the-money call if that fits better with your trading style.
The next step is to sell a cash-secured put on the same stock. This means that he is prepared to add another 100 shares if it is assigned.
By selling both a call and a put, Lance collects premiums from both sides and lowers his cost basis correspondingly.
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Managing a Covered Strangle
In the video, Lance Kaminsky sums up how he manages the three possible outcomes of Covered Strangle:
Scenario 1: The price ends between the call and the put strike
If the stock price remains between the two strikes at expiration, both options expire worthless, allowing Lance to keep the premium from both sides. He can then repeat the process, lowering his cost basis with each cycle.
Scenario 2: The price drops below the put strike
Should the stock price dip below the put strike at expiration, Lance gets assigned another 100 shares, increasing his holdings to 200 shares. He then sells two covered calls at a strike price above his cost basis, waiting for the stock to recover.
Scenario 3: The price rises above the call strike
If the stock price exceeds the call strike, he is at maximum profit due to the capital gains on the shares, plus the premiums from both options. In this case, the shares will be taken away from him and he may start a new cycle.
How to reach Lance Kaminsky
Lance runs the website Thetatraderz.com. He also has his own YouTube channel.
It was great discussing the covered strangle with you.
Thank you so much for sharing your strategy and experience, Lance!
Great trade strategy! Thanks for sharing it with us.
Thank you, Brian! It does have some similarities to your In The Money Covered Call – although not the same: https://www.thetaprofits.com/in-the-money-covered-call/