The September 28, 2016 segment of Market Measures, "Covered Strangles: Short Stock" examined the idea of a short stock position and an added short Strangle, something we call a Covered Strangle with long stock. Our Futures expert, Pete Mulmat, joins the guys to explore a Futures version of this trade strategy and gives it a twist centered around liquidity concerns.
Pete began by reviewing the benefits of the adding a short Strangle to either a long or short position. By selling the 30 Delta Put and 30 Delta Call you have “room to be wrong”. A chart demonstrated this visually. A table demonstrated how we would expect a short /ES position to be 5 times that of a short SPY (S&P 500 ETF) position. Pete further explained how selling a future with an extended rally and a strangle in a future with a equal or higher implied volatility would be an alteration of the trade that would increase its advantages.
A price chart of both the /ES (E-mini S&P 500) and /NQ (E-mini Nasdaq 100) showed how much more the /NQ has rallied since the sell-off following the Brexit vote. The Implied Volatility Rank (IVR) of both though is the same. A table listed the high correlation of the /ES and /NQ but another table noted that although the options in /ES has good liquidity that the options in /NQ did not. Pete then laid out his version of the Covered Strangle with a twist to account for the liquidity problem. The trade idea included the current price, Delta, premium received and the Buying Power Reduction (BPR). It was short one /NQ Future but the short Strangle with the 30 Deltas was in the /ES.
For more information on Covered Strangles see:
Closing the Gap from December 22, 2015: "Covered Strangle: Synthetic Underlying"
Market Measures from September 20, 2016, "Covered Strangles: Long Stock"
Watch this segment of Closing the Gap - Futures Edition with Tom Sosnoff, Tony Battista and our Futures expert Pete Mulmat for an interesting Futures version of our Covered Strangle Strategy,
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