Dr. Singh’s Zero Risk, 4 Legged & 3 Legged Options Strategy
They typically work whether stock goes up..Goes down..Remains Flat
Dr. Singh’s Zero Risk Strategy
When we expect a stock to go up much higher than it will go down we implement this strategy. We don’t expect the stock to remain flat on the day of expiration of the long call and put.
Here is a recommendation we gave for the stock AXON recently, when it was trading at $14.94.
- Buy AXON strike price 12.50 call expiring Aug 18, 2017
- Buy AXON strike price 5.0 put expiring Aug 18, 2017
- Sell AXON strike price 15.0 call expiring Dec 15, 2017
- Sell AXON strike price 12.50 put expiring Dec 15, 2017
The following graph shows that on August 18, 2017, if the stock drops to $0 we have a profit of $330 and if it goes up to $60, our profit is $1,004. The only time we make a smaller profit is when stock remains flat. Even though the risk is $0, we tell our clients to assume it be about $200 to account for any uncertainties.
The following graph is based on Black Scholes option pricing formula.
Dr. Singh’s 4 Legged Strategy
We use this strategy when we are almost sure that it will make a big movement on a certain day but not sure of the direction.
The following example will make the strategy clear.
Here is a recommendation we gave for the stock CIEN recently, when it was trading at $25.75.
- Buy 3 $26 calls expiring March 17th
- Buy 3 $26 puts expiring March 17th
- Sell 2 $26 calls expiring March 10th
- Sell 2 $26 puts expiring March 10th
Note that the strike price is the same ($26) for all the options but we buy more than we sell.
Here is what we are doing in this trade:
We picked up a stock whose March 17th weekly call and put options can be bought at a relatively lower price than the ones for March 10th which can be sold at a relatively higher price. In this case we bought the calls and puts which expire on March 17th and sold the calls and puts which expire on March 10. Therefore 3 calls and 3 puts are long and 2 calls and 2 puts are short. We have an extra long call and an extra long put to take advantage of up or down movement of the stock.
If you have a stock which may be coming up with its earnings report or some other major news on a certain date, you enter a day before that event and get out the next day. Who cares if the news is going to be good or bad? You are covered on both sides.
Thus we can take advantage of the movement of the stock in just one day.
Even if we don’t get out in one day, as we come closer to March 10th, the options we sold will lose their premium faster than the options we bought for March 17th. So we may break even if the stock closes flat at $25.75.
If the stock moves up or down, we have an extra call and put option which expire on March 17.
So we end up making money whether the stock goes up or goes down.
Our strategy behind this process is to risk limited money to make unlimited profit.
When we put this trade in our brokerage account and check the risk factor, it shows the risk for doing this trade to be zero.
You can see that the brokerage has created a graph of our trade result even if the stock moves dramatically up or down.
But we usually tell our clients the risk to be about $200, not zero as indicated on the graph, to account for any errors and to account for market deviations from historical patterns…
We feel it is worth the risk of about $200 to make $1,000; $2,000; $10,000 or more.It’s humanly impossible to find such trades without the help of our sophisticated software.
Dr. Singh’s 3 Legged Strategy
In these spreads, we sell a call and sell a put at the same or different strike prices.
In most cases, we may buy a call at a strike price below or above the short call strike price to cover our risk on the up side.
We pick up the options where we can collect enough credit premiums to limit downside risk.
Here is a spread that we recommended to our clients for the stock AXON when the stock was at $11.72.
- Sell the $12.50 call expiring September 15
- Sell the $5 put expiring September 15
- Buy the $10 call expiring August 18
We picked up a long August call to protect us on the upside as well as to keep our collected credit high. The idea behind this strategy is to reduce the risk and use the collected credits to protect both sides.
The following graph shows that the stock has to drop below $2 on August 18 before you lose money.
The 52 week range of this stock is $10.69 to $17.66. It has never traded below $9.00.
Although anything is possible, it is highly unlikely that this stock will go below $2.00 on August 18. Our approach is extremely conservative and well studied.
The following graph is based on the Black Scholes option pricing model.
Attend a webinar to have a more clear understanding of the above strategies.
Dr. Harsimran Singh, Ph.D.