In my last article, Options-Picking The Equity, I gave my reasons to use GDX for your option trades. As pointed out in that article, GDX has gone sideways for the year, but my option trades have been profitable, aided by volatility which can inflate the time value of option premiums. On six occasions GDX traded above 60 only to fall back below 56. The high in 2011 was above 66 and the low was near 50.
There are many option strategies that I use with GDX, but three commonly used are –
- one for a sideways market
- one for an up market
- one for a down market.
This post is my strategy for a sideways market. I use short straddles for a sideways, less volatile market – picking a strike price slightly above the stock price. Then I sell a put and call for the same strike price 7 or 8 days out. Here is what can happen:
- First, one of the options is going to expire worthless.
- Second, if I am lucky and the price doesn’t move during that week I win on both of them.
- Third, most of the time one of them is underwater and I owe on it. I take this underwater option and buy it back, sell another option on the same equity, usually at the same strike price, but a week or more out depending on how much underwater I am. If you are too far down you may have to push it out a month or more.
Look at the strike price 57 on the chart below. The top chart is about to expire. The bottom chart is 1 week out. The 57 expiring call is worth 49 cents, the 57 put 26 cents. You can see that if you roll both of them out (buying them back and selling forward) one week out at the same strike price you can receive 99 cents for the call and 76 cents for the put.
above image – TDAmeritrade Chart
The premium on the week out chart is at least 100% more than either expiring option on this example, so it is possible to make money even on the losing side of the trade!
Remember, this strategy works best on a sideways market.
Written by Goldfinger
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