Wouldn't Buying Both A Put/Call On The Same Strike Price Produce Guaranteed Returns?
- lee
- Dec 7, 2017
- 1 min read
Updated: Jan 8, 2019
Hi, to a novice, yes, it would seem that buying both a call option and a put option (a straddle) would produce a guaranteed win as you’re covered on both sides, yes?
But what happens if the stock goes nowhere when you’ve reached your expiration date?
You’ll lose on both sides, giving away a majority of the premium you paid to enter the trade.
To make it simple, let’s use an example.
The stock is at $50. You think it’s going to move big either way within three months.
You buy both a $50 call option and a $50 put option for $3 each for a total outlay of $6 ($600).
Three months later, the stock hasn’t moved and is still at $50. Both options will expire worthless and you just lost your $600.
Bottom-line, when you buy options, you better be darn good at getting the direction correct, the magnitude of that direction (how far it will move), and the timing of that move (expiration date).
Too hard in my opinion to make consistent profits as an option buyer.
That’s why I’ve been selling options profitably for 26 years and showing my readers how in our newsletter.
See my other post here about how our crystal ball helps us make smart decisions as option sellers.
Let me hear from you. Give me comments below and pass onto a friend.
Enjoy!
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Hi Linda, thanks for the comment.
Yes, when we sell out-of-the-money put options, we do have an outlook for the stock in the near future, mostly neutral-bullish.
When you buy any call option, whether it is in-the-money or out-of-the-money, you still need the stock to go up in order to make a profit. No ifs, ands, or buts. If the stock doesn't go up, the call option will wither away.
When selling out-of-the-money puts, we don't necessarily need the stock to go anywhere to make a profit. As long as the stock doesn't move too far against us (dropping below the strike price), we will eventually keep the premium we collected from selling the put option.
Although I do consider…
Hi Lee, I have been a subscriber (and I am impressed with your recommendations) to your advisory services for several years now. I have a question. You recommend selling very OTM put options with an expiry date of about 3 or 4 months into the future and this produces results! And you say it is better to options than to buy them. But to make these predictions re making money from selling out of the money Put options, you must have been studying the technicalities of the underlying equties and expect their share price to increase by the time of the expiration. Otherwise if the price went down below our option price at expiration, we would all have the underl…