This morning I sold 2 BBVA Jan 19 ’13 $8 Calls @ .60 for a premium of $120 and I simultaneously sold 4 BBVA Jan 19 ’13 $6 Puts @ .40 for a premium of $160. My total premiums collected are $280 not counting brokerage fees. I currently hold a little over 400 shares.
I believe this is called a Short Straddle. I don’t pay too much attention to particular strategy names, rather I just like to think logically about how my trades can play out.
This trade can play out in 3 different ways assuming I don’t buy back the calls or puts:
1.) If BBVA stays between $6 and $8 around expiration on Jan 19 ’13 then I will make $280 profit. My position doesn’t change and I’ve reduced my cost/share to $6.57/share from $7.26/share currently .
2.) If BBVA trades higher than $8 around expiration, I will have 200 shares called away at $8 per share. I’ll make $.74 per share + $280 in premiums for a total profit of $428.
3.) If BBVA trades lower than $8 around expiration, I will have 400 shares put to me at $6/share and collect the premiums of $280. My cost on the additional 400 shares would be $5.30/share. This would reduce the cost/share of my total position (of around 810 shares) to $6.29/share.
I’ve been selling a lot of puts this year but haven’t sold many covered calls as I don’t have many position over 100 shares currently. I also don’t want to risk losing my whole position in the positions that are over 100 shares.
I’ve updated my trades on my options tab.