Peter D - Confessions of the PSW Strangler
Peter D has a long-running and very successful system of selling premiums on a regular basis that’s well worth learning.
Investors selling a short strangle are expecting the underlying stock to not move much in either direction. The strategy is accomplished by selling a call option at a higher price than the current stock or ETF price and by selling a put option at a lower price than the current stock or ETF price. Both of the options will have the same expiration month. The investor in a short strangle benefits from the underlying moving within the spread between the call strike and the put strike.
There are two reasons we like this strategy a lot at PSW:
1) It’s boring! Unless the market is MUCH more volatile than normal, taking sensible, NON-GREEDY, out-of-the-money short option positions is a fairly market-neutral way to place our bets. While the risk/reward ratio may seem inverted, statistically it’s a winning play over time.
2) It’s perfect for our "be the house, not the sucker" philosophy of trading. We are always looking to SELL volatility. The idea behind this trade is that front-month volatility is relatively expensive compared to historical long-term volatility and we take advantage of selling a very high cumulative volatility over the course of the year.
We recently ran a collection of comments following through on some trades over time and quite a while ago Sage wrote an article relating about using short strangles on longer-term stock plays, which provides some additional ideas on how to apply this strategy. Peter has been kind enough to provide us with a definitive guide to help set you on the road to a successful career as a strangler. The following is a collection of posts (make sure you use the links) on Short Strangles and the Crazy plays on the indices (SPX, RUT, NDX, etc.):
1- The Crazy play consists of a Short Strangle and a protective long put vertical. These plays are mainly for Portfolio Margin accounts, with balance greater than $125,000, preferably over $200k as the margin can swing wildly.
2- Very rough comparison among Short Strangle, Iron Condor, Buy/Write and straight stock purchase. Note the rolling tips in the second to last paragraph.
3- VIX, the effects of.
4- Possible adjustments of the Crazy Play.
Additional discussion on doubling down.
5- Figuring out the margin requirement for short strangle using Thinkorswim Analyze Tab.
6- Setting up February 2010 spreads on Jan 4th.
7- Thoughts on Delta movement with respect to the underlying.
8- Selling into a VIX excitement, play-by-play examples, including the discussion on escape routes:
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