Thursday, October 1, 2009

GLD Stranglehold

In last month's Strangling Gold post, I highlighted an October short strangle on GLD, the gold Exchange Traded Fund. Let's review how the play is working out.

At trade inception (Aug 24th), GLD was hanging around $92.50. Based on the assumption that options were overpriced and GLD would remain somewhat range bound, I opted to enter a strangle by simultaneously selling an October OTM call and OTM put. Let's review the trade details:

Short 103 call for $.90
Short 86 put for $.60
Net Credit = $1.50

Here was the original risk graph (click image to enlarge):
[Source: EduTrader]

Here's the risk graph as of today:

Despite the breakout and strong rally experience by GLD in early September, it was still able to remain inside of our profit range. Currently the 86 put is worth a mere $.05 and the 103 call is worth $.40. I've already bought back the put and currently have an order in to buyback the 103 call at $.20. Assuming GLD doesn't go berserk within the next two weeks, I anticipate my order getting filled pretty soon.

I was fairly pleased with the outcome of the trade so I'm considering giving the short strangle another shot for November. Here's an example of what the trade may look like:

Short Strangle
Short Nov 107 Call for $.70
Short Nov 92 Put for $.70
Net Credit = $1.40

If the theoretical unlimited risk inherent with short strangles is outside of your comfort zone, you may consider exploring its limited risk counterpart, the iron condor.

3 comments:

Anonymous said...

Why not always put on iron condors instead of strangles? You're paying some for the wings, but it reduces your capital outlay so much (lower margin) that the trade, if successful, has a much higher ROI. I'm not sure what the down-side of the IC over a strangle would be, aside from higher commissions and a slightly reduced profit range...

Tyler Craig said...

good points- I'll do a post to highlight potential differences in the next day or two. BTW the two you mentioned are definitely legit differences.

Tyler Craig said...

Anon-

I highlighted your question in the latest blog post-

Mailbox- Iron Condors vs. Short Strangles.