Tag: Peter Seed

Reassessing Risk in Options Trading
For those of us who trade short strangles, it’s not uncommon to occasionally tap the brakes and revisit the fundamental risk-reward profiles of the core options strategy levels:

Level 1 – Long Options or Covered Calls

Level 2 – Cash-Secured Short Puts

Level 3 – Debit Spreads

Level 4 – Credit Spreads

Level 5 – Naked Options

As you move up the ladder, the potential risk exposure increases. Sometimes, it pays to take a step back and trade with more measured risk.

Introducing the “Poor Man’s Short Strangle” (PMSS)
One such lower-risk alternative is the Poor Man’s Short Strangle—a flexible strategy that can be built incrementally.

Step 1: Acquire 100 Shares
You begin by owning 100 shares of stock. This might happen by design, or you may have been assigned shares through a short put position held to expiration. Perhaps it’s simply a stock you believe in and would be comfortable accumulating further.

Step 2: Sell a Covered Call
Next, you write a short call against those 100 shares, creating a covered call position. This limits your upside, but it also caps your downside risk from the call. If the stock rises, you benefit from the gain in the share price, while also collecting the call premium.

My preferred approach is to sell calls with:

30–50 days to expiration, and

Delta between 0.15 and 0.40

Step 3: Add a Short Put
If the stock price falls more than expected, you can add a short put, effectively transforming the position into a Covered Short Strangle.

This creates three possible outcomes:

Stock Rises
→ You profit from the increase in share price up to the strike of the short call, and you keep the call premium.

Stock Trades Sideways
→ You keep both the call and put premiums as time decay works in your favor.

Stock Falls Below Put Strike
→ You may be assigned additional shares, averaging down your position—assuming you’re comfortable increasing your stake.