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Why I like trading strangle strategies

Why do I like trading strangle strategies? The simple answer is – because I can roll them for credit. And it is easier to manage.


Why trading strangle is better?

Yes, any other strategy out there – spreads, be it Condors, single side spreads or even a single option such as call or put options are difficult to roll for a credit. And when rolling options trades, you want to roll them for credit! Always!

Exception to trading strangle strategies

There is only one exception to this rule when it is OK to roll for a debit – to a certain extent – covered calls. Why covered calls are OK to roll for a debit? You can do it as long as the gain on your stock offsets the debit while rolling the call. Otherwise, it is better to let your share be called away.

For example. You have a covered call with a $60 strike price and the stock moves to $65 a share. You do not want to have your shares called away and so you decided to roll your call away and up. You decide to roll into the next month and $70 strike. You pay a 0.39 premium to do it. Was it worth doing it? Well, you gave your stock a new ceiling. It trades at $65 and now you are willing to sell it at $70 a share. that is 0.50 gain per share or $50 for 100 shares. You paid 0.39 per share or $39 for 100 shares to roll the call. You are still positive. You can do it.

But what if you would have to pay a 2.89 premium (or $289) to roll the call? Well, now you are paying money out of your pocket and when you get called away at $70 a share, you still may see a loss (or at least reduced gains). And that is what I personally do not like to do. What to do then? Use strangles.

Rolling strangles

When selling strangles, you sell both sides. It is an Iron Condor but without protective long legs. People are extremely scared of using naked options but they are actually safer and easier to manage. When one side gets breached, you can roll your trade, and even if one side is a debit trade, the other side will be a credit trade, and most of the time that credit will be large enough to offset the debit side. Most of the time, you can roll a trade up and down as the market fluctuates, and many times, you will be able to do it within the same expiration cycle.

Here is an example of a rolling trade I did today:

Trading strangle - rolling

As you can see above, I could roll the existing strangle within the same expiration cycle, higher, and for credit. No other structure can do this for you. And when at some point I cannot roll within the same expiration cycle for credit, then I move the strangle trade to the next expiration cycle.

Sometimes, when the market is volatile, I roll my strangles multiple times. When you check my trading journal, you will see 20 or more rolls and expiration dates moved far away. Some people do not like it. They say that by doing so, I block too much capital for too long. True, but I also protect my capital. With strangles, the losses can be large if left alone without any management.

To me, once the trade goes bust, it is no longer about gains and percentages. It is now about preservation. If you do not want to manage a trade, then yes, trade spreads. Once a spread goes bust, you can convert it to an Iron Condor by adding the opposite side. That will help to bring enough credit to offset a roll so you may roll the touched side. Then you have one more management tool – converting your Condor to Iron Fly by moving untouched side close to your touched side so your shorts become a straddle (same strikes) which will bring some more credit, and after that, you are done. Let it go.

Not my cup of tea.

I have read (and heard) that there are some traders who roll their trades as long as they work for them and then they go out. If it means rolling some trades indefinitely, so be it. And I am one of those traders.

What are the disadvantages of trading strangles?

There are a few caveats to trading strangles. Although I love them, they are not always so great.

Trading strangles is expensive

Trading strangles is expensive. So it is better to use margin or if you have a large enough account, use covered strangle. What does that mean? Basically, trade cash-secured put side and covered call side. That’s it. But even with that, it still will be capital requirement heavy trading.

Naked strangles can be very volatile

If you decide to use margin trading strangles, be prepared for volatility. I am fighting with volatility all the time (partially because I am not disciplined and overtrade). And when volatility spikes, strangles can give you a really hard time. Many times, I had to roll a trade to make it neutral and release buying power, which on one hand is great – no margin call, on the other hand, hurts my trade by prolonging it or moving a trade that is not necessary to move, and makes my broker happy as he collects more fees. And sometimes, when volatility spikes, adjusting a trade won’t help at all. So, if you decide to use margin, keep enough cash in your account.

Risk to the upside

Although the downside (put side) is somewhat limited, the call side is unlimited. Although your broker tells you that the put side has unlimited risk, it is not true. The underlying stock can go to zero only, so your loss will be equivalent to the loss of a stock whether you get assigned or not. if your stock is trading at $30 a share and you sell $30 strike put and the stock goes to zero, you lose $3,000. You will never lose more than that.

On the other hand, the call side is truly unlimited. The stock can go from $30 a share to $300,000 a share and your losses can be more than what you have. So always try to trade strangles with your call side covered and if you cannot hold 100 shares, use stocks that are relatively safe – established companies, for example. Never trade it using penny stocks or high-flying meme stocks, or you may get busted.

Once I have read about a trader who sold a bunch of naked calls against a pharmaceutical stock that was trading for $3 a share. The trader was expecting the stock to go belly up and he would pocket nice profits on his worthless calls. But overnight, another company announced a merge and the penny stock opened at $37 a share in the morning. His losses were in hundreds of thousands of dollars. With no way to fix it.

Although this scenario is unlikely when trading established good quality stocks, the risk is still there. As an old adage says: anything can happen. So if you see your stock going up, roll your strangle with the stock to keep it delta neutral (or close to it) or start buying shares (that’s what big money funds do).

Hope this helps to explain why strangles are not as dangerous as many try to tell you and in fact, can be safer.

Did you like this post? Hit the like button for me, please. And if you hated it as full of hogwash, hit that dislike button for me too. I won’t write hogwashes anymore if too many dislikes are hit. I promise.


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