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Strategy View
Investor is certain that the market will not be very volatile (will neither
go up nor down very much).
Strategy Implementation
A call option and a put option are sold with the same strike price a.
Upside Potential
Limited to the two premiums received - will be realised if market at expire
is exactly at the strike price level.
Break-Even Points
The lower point b
will be the strike minus the value of two premiums received, the upper
point c will be
the strike plus the two premiums received. (If the investor would like
to broaden this band, a sell strangle might be interesting).
Downside Risk
Unlimited - should the market fall or rise greatly.
Margin
Always required.
Comment
If the market does little then the value of the position will benefit as
the short positions gain when the option time value falls.
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