Procter & Gamble is a defensive stock that has been holding up well during the recent market volatility. On the chart, PG stock shows clear upside resistance at 164 and on the downside, the 50-day moving average currently has risen back to 155.
Using an option strategy called a short strangle, we can sell call options at resistance and sell put options at support. By doing so, we can generate two separate lots of option income and achieve a profit on range bound stocks.
This is a risky trade because it involves the sale of naked options, so it is not recommended for beginners.
The losses are potentially unlimited so always keep that in mind.
PG Stock: Setting Up A Strangle In Options
Let's take a look at an example using PG stock.
Specifically, we'll look at a short strangle with a May 20 expiration date.
To set up a short strangle, traders could sell the 165 call and the 152.50 put.
At the close of trading on Tuesday, the 165 call was trading around $1.55 and the 152.50 put was also trading for $1.55.
Reward Vs. Risk
Selling these two options would generate $310 in premium with break-even points at 149.40 and 168.10.
PG is not due to report earnings for another three months, so there would be no earnings risk with this trade.
According to IBD Stock Checkup, PG stock ranks 2nd in its group and has a Composite Rating of 88, an EPS Rating of 72 and a Relative Strength Rating of 88. Procter & Gamble recently cleared a cup with handle and its 161.31 entry. Shares are trading just beneath that correct buy point.
Selling strangles on range bound stocks is a popular trade for option traders, however it's important to be aware of the risks when trading naked options.
Always remember that options are risky and investors can lose 100% of their investment.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
