Thinking outside the box is always a good mental exercise but wheen it comes to premium selling it can have additional advantages. We compiled five different methods of getting short and underlying. What are those five ways and what are the advantages and disadvantages?
The first method is the Synthetic Position. A long at-the-money (ATM) Put and a short ATM Call is the same as being short the underlying from a P/L point as was demonstrated in a P/L graph. An accompanying table listed the advantages such as a lower Buying Power Reduction (BPR) and disadvantages like a lack of Theta (time decay). A covered Put is another way to get short. Adding a short out-of-the-money Put to a short underlying has the same benefits of a Covered Call, only to the downside. A downside is that profits are capped while and advantage is a lower BPR. Tom pointed out that, “If you want to improve your cost basis and improve your probability of success, you have to give up something in return by capping profits. That’s the way markets work.”
A short Call is another method of getting short. Usually we short an ATM or OTM Call. An advantage is the increased probability of success thanks to Theta (time decay) but a disadvantage is the capped profits. By adding a short Put, one can turn this position into a skewed Strangle as long as the Put is more OTM than the Call. Instead of a delta neutral trade now it has a definite downside bias. Adding the short Put can increase breakevens but a disadvantage is the added risk of a move too far to the downside.
The final method is a Vertical Spread. A debit Put spread in which the long side is in-the-money (ITM) and the short is OTM has a Theta advantage and benefits if IV increases. Using the same strikes a credit Call Spread would benefit from a decrease in IV. The disadvantage of both is that there is no advantage in rolling the position if we are wrong.
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for all the advantages and disadvantages and a great piece of research on 5 ways to get short.
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