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It is an limited risk trade, right? Say you buy the DAL JUN 21 30 call and sell the same put. The cost is only about $0.60. But if drops to 25 at expiration you lose the $500. So, little capital, but large risk.
How about buying that same 30 call for $6.60. And sell the 9 OCT 20 call so your capital is $5.90, and then sell a call every week that is $2 OTM for the next 35 weeks collecting even $0.50 a week? Then you end up with roughly 200% gain even if the stock doesn't rise.
Defined risk trade, risk getting called out capping your profit, but potentially still a very nice protected gain.
You can change the exercise risk by modifying how far OTM you sell, and if you are directionally correct you can roll the ITM long closer and get more contracts.
I never take an unlimited risk trade unless I am very confident, and there is no way to know SAVE or DL won't go through bankruptcy in the next year. If they do, the process is long and IV makes the diagonal trade profitable sooner.
Thanks for your reply. I mean buying a $30 call and sell a $27 put so get a net credit. For the strategy you called out, wouldn’t it be so hard to set the strike price for selling the st call? Understand we can modify the risk by set a deeper OTM price, but what if you were assigned one as the price fluctuate a lot?
You have a long call, so if you get exercised you exercise or use cash to buy. I sell my shorts at 30 delta, buy my longs at 60 delta.
Subject Expert
You are doubling down on the stock going up a year from now. It’s a fine strategy if you believe you have the right entry. Just make sure you set aside the cash to buy the equity if your put gets assigned.
In my opinion, I would buy recovery LEAPs for 2022 not 2021.