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We also BUY a CALL one strike price further out than
CALL we sold. We also BUY a PUT one strike price further out than
one we sold. The cost of these calls should be less than
amount you made from selling
options in
first place as they are perceived by
market to be more 'unlikely' than
ones you sold (obviously, if it isn't
case, you don't bother). The cost of buying
cover will usually be about 2/3
price you made from selling, so you just made a cool 1/3 cash for taking a strictly controlled position!
As research at www.traders101.com leads us to believe that we can expect this trade to win at least 80% of
time, and our losses are limited to
difference between out 2 PUTS or our 2 CALLS, you have to ask, 'is this free money?'. The answer is no. The downside is
cost of
options. Even at a deep deep DEEP discount broker fee of $10 a round trip, that's 4 of them - i.e. $40. If you don't choose
right strikes, you could still end up losing money (basically,
profit less commissions needs to be at least a quarter
size of
potential losses to break even on an 80-20 rule).
Does it scale? Yes. Do I use it? No. There are actually easier ways to make money day trading! Whatever you do, CONTROL THE RISK FIRST, SECOND, AND THIRD.

Trader Jack writes exclusively for www.traders101.com - the free site for traders by traders