Continued from page 1
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