V.3:2 (57-58): Writing Neutral Options Spreads by Scott Silver

V.3:2 (57-58): Writing Neutral Options Spreads by Scott Silver
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Writing Neutral Options Spreads by Scott Silver

Most investment advisors, stockbrokers and the like give their clients investment advice such as "Buy IBM stock, the market's going up," or "There's a glut of oil on the market, sell Exxon," etc., etc. Investment advisors for pension plans and portfolio managers of large institution accounts trade the market by buying and selling stock market indexes, futures and options. These are group mixtures of stocks ranging from 50 to over 1,000 stocks. All of these people- investors, advisors, brokers, etc., have one thing in common: They want the market to move in their direction.

A neutral option writer is a different type of investor. In fact, he does not care in which direction the market goes as long as his accounts (books) are balanced. He sells overvalued calls (rights to buy) and overvalued puts (rights to sell) of a stock or commodity, and then during the life of that option, continues to keep his "books" balanced so that wherever the issue expires, he collects all of the option premium. This neutral option strategy is called a strangle.

In October 1984, the Gold market traded in a narrow range, David L. Caplan sold puts of February 1985 Gold at 320 and calls of February 1985 Gold at 380. To do this he put up only $700 in margin, to insure that he would pay for any losses though the commodity exchange, and collected a $700 premium. Caplan authors a newsletter Opportunities in Options and heads up the Commodities and Options Department of Jesup & Lamont Securities Co., Inc. in Los Angeles.

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