Predicting stock prices? How to use options to earn premiums? (Naked Strangle Example)
What options combinations can be used to bet on a range rather than just a single price?
The naked strangle strategy, simultaneously selling both call and put options with different strike prices but the same expiration date, to bet on a price range.
Next, I will first present the logic behind predicting stock prices, and then explain how to construct a naked strangle for profit.
*The following is for reference only and does not constitute investment advice.
In the medium to long term, Tesla $Tesla (TSLA.US)$ 's stock price is in a downward channel and is struggling to break through the resistance level of 208-220.
From market performance and the macro environment, there are many factors limiting Tesla's sharp rise:
1. Slower-than-expected inflation and market interest rate reduction expectations moving closer to the Federal Reserve.
2. Market heat and trading funds concentrated in AI and chip sectors.
3. Market indices at record highs, and the survey shows a bullish regression convergence. Does it indicate limited upward momentum in the overall market.
1. Slower-than-expected inflation and market interest rate reduction expectations moving closer to the Federal Reserve.
2. Market heat and trading funds concentrated in AI and chip sectors.
3. Market indices at record highs, and the survey shows a bullish regression convergence. Does it indicate limited upward momentum in the overall market.
Assuming that Tesla's stock price will stay between 200 and 220 in the next half month, how should we proceed?
When dealing with sideways-moving stocks, I prefer options trading over buying and selling stocks outright, mainly for the following reasons:
1. Leverage: Allows control of a large amount of stock with a small amount of capital, amplifying profit potential.
2. Strategy diversity: Supports multiple strategies (including bullish, bearish, and neutral), providing flexible investment options.
3. Time value utilization: Options' value is affected by remaining validity period and market volatility. In sideways markets, income can be generated by selling options with time value.
1. Leverage: Allows control of a large amount of stock with a small amount of capital, amplifying profit potential.
2. Strategy diversity: Supports multiple strategies (including bullish, bearish, and neutral), providing flexible investment options.
3. Time value utilization: Options' value is affected by remaining validity period and market volatility. In sideways markets, income can be generated by selling options with time value.
Should I be a buyer or a seller in options trading?
Let's use a casino analogy to explain the concepts of option buyers and sellers.
In a virtual casino called "Option Paradise," there are two main roles: the house (option seller) and the gambler (option buyer).
The house, or option seller, is the provider of this game. They control the game rules and, in exchange for a fee (premium), give the gambler (option buyer) a chance: the right to buy or sell a stock at a predetermined price in the future.
The gambler, or option buyer, has their own predictions about future market trends. They pay the house a premium to obtain the right to buy or sell a stock in the future. They hope that, if the market moves in their predicted direction, they can profit by exercising the option.
If the market moves as predicted by the gambler, they can profit by exercising the option. If not, the premium they paid becomes the house's profit, and the gambler loses that money. This story succinctly illustrates the concepts of option buyers and sellers in stock options trading: buyers accept higher risks for potentially higher returns, while sellers earn premiums and bear relatively lower risks.
Understanding this analogy, you'll realize that describing sellers as having "limited profit and unlimited loss" and buyers as having "unlimited profit and limited loss" is highly misleading—expectations of unlimited profits are often inflated by greed, as stocks are unlikely to skyrocket, while limited loss is still a maximum of 100%, equivalent to a total loss.
Therefore, in this transaction, I prefer to be a seller for three reasons:
1. Option time value decreases with time, known as "time decay" or "Theta decay." Delayed market movements may result in time value loss, offsetting profit from stock price changes. For option buyers, the timing of realizing profits is as important as predicting stock price movements.
2. For stocks with low volatility, being an option seller to collect premiums is a good strategy. So, I have decided to sell Tesla's options.
3. If you are confident in your judgment, option buyers should only take one side (too many buyers increase strategy costs). Option sellers can open multiple positions appropriately (collecting multiple premiums).
1. Option time value decreases with time, known as "time decay" or "Theta decay." Delayed market movements may result in time value loss, offsetting profit from stock price changes. For option buyers, the timing of realizing profits is as important as predicting stock price movements.
2. For stocks with low volatility, being an option seller to collect premiums is a good strategy. So, I have decided to sell Tesla's options.
3. If you are confident in your judgment, option buyers should only take one side (too many buyers increase strategy costs). Option sellers can open multiple positions appropriately (collecting multiple premiums).
Earlier, it was mentioned that assuming Tesla will stay between 200 and 220 in the next half month, a certain option strategy is very suitable for betting on a price range—the naked strangle, also known as the double-selling strategy.
The steps to construct the strategy are as follows:
1. Sell a call option (Short Call): Set a higher strike price based on the expectation that the underlying asset's price will not exceed this level.
2. Sell a put option (Short Put): Set a lower strike price based on the expectation that the underlying asset's price will not fall below this level.
This strategy aims to capture fluctuations within the strike price range and profit by collecting premiums at both ends. The main risk is that unexpected market volatility may lead to unlimited losses, as the seller is obliged to execute the options at unfavorable prices.
1. Sell a call option (Short Call): Set a higher strike price based on the expectation that the underlying asset's price will not exceed this level.
2. Sell a put option (Short Put): Set a lower strike price based on the expectation that the underlying asset's price will not fall below this level.
This strategy aims to capture fluctuations within the strike price range and profit by collecting premiums at both ends. The main risk is that unexpected market volatility may lead to unlimited losses, as the seller is obliged to execute the options at unfavorable prices.
I have decided to short the 200 Put and 225 Call options half a month later.
Betting on positions within a range can be adjusted according to individual risk preferences. For example, constructing a strangle by shorting the 195 Put and shorting the 230 Call is also feasible.
Compared to the combination of strike prices at 200 and 225, the combination of 195 and 230 offers a wider range, with lower risks and potential losses for the seller, and correspondingly, less premium received. This is why I mentioned that specific strike prices should be determined based on individual risk preferences.
The performance of shorting the 200 Put and 225 Call options at this point is as follows:
Scenario one: If the stock price falls between 200 and 225, maximum profit is realized. Two option premiums are collected;
Scenario two: If the stock price falls between 190-200 or 225-235, partial profit is realized. This is because the income from option premiums offsets the loss from one of the options (for example, if the stock price falls to 195, the loss from shorting the 200 Put offsets part of the premium income);
Scenario three: If the stock price falls outside the range of 190 and 235, the strategy starts to incur losses. The degree of loss increases with the degree of deviation.
Scenario one: If the stock price falls between 200 and 225, maximum profit is realized. Two option premiums are collected;
Scenario two: If the stock price falls between 190-200 or 225-235, partial profit is realized. This is because the income from option premiums offsets the loss from one of the options (for example, if the stock price falls to 195, the loss from shorting the 200 Put offsets part of the premium income);
Scenario three: If the stock price falls outside the range of 190 and 235, the strategy starts to incur losses. The degree of loss increases with the degree of deviation.
Please note that the profit and loss performance discussed earlier is based on the expiration date, and the current profit and loss also need to consider the impact of time.
Summarizing the overall train of thought: Analyzing Tesla's stock price performance—Expecting friction between support and resistance levels—Constructing the naked strangle options strategy—Analyzing the strategy's profit potential.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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EZ_money : nicely done
103161318 : Hello