Alert

Looking for even more trade ideas? Sign up for Alpha Boost, a FREE email from quiet foundation!

Synthetic Covered Strangle | IRA Options

Mar 11, 2016

By: Josh Fabian

Covered strangles involve buying stock, selling a call and selling a put. In a regular margin account, this strategy can be used without using too much buying power. However, using this strategy in an IRA account requires putting up enough capital to cover both the long stock and the short put. Let’s use Apple to illustrate what this would look like:

  • Buy 100 shares Apple at $97 = $9700 in buying power
  • Sell 1 March 94 Put for a credit of $1.20 = $9280 in buying power
  • Total Capital Required = $18,980

If you’re trading in a small account, or if you just don’t want to put up that much capital to place a trade, there are other actions you can take. For instance, constructing a synthetic equivalent to create a covered strangle. In this episode of IRA Options, Liz and Jenny showed how to create this type of synthetic. Remember, many strategies not available in an IRA can be replicated using a synthetic. It simply requires a little creativity.

To create a synthetic covered strangle, we begin by selling an in-the-money put. Selling an in-the-money put is the synthetic equivalent to buying stock and selling a covered call. Let’s go back to our Apple example but this time, we’re going to use an in-the-money put:

Sell 1 March 98 Put for a credit of $2.80 = $9530 in buying power

Next, we look to sell an out-of-money put. Liz and Jenny like to use a put with a 65% probability of expiring worthless. Back to our example:

  • Sell 1 March 98 Put for a credit of $2.80
  • Sell 1  March 94 Put for a credit of $1.20
  • Total Credit = $4.00
  • Total Capital Required = $18,800

$18,800 is a considerable amount of capital to tie up in one trade. Therefore, we look to buy two even further out-of-money puts. Buying out-of-money puts reduces how much buying power is needed because it limits your risk. Back to the example:

  • Sell 1 March 98 Put for a credit of $2.80
  • Sell 1 March 94 Put for a credit of $1.20
  • Total Credit = $4.00
  • Total Capital Required = $18,800
  • Buy 2 March 88 Put for a debit of $0.33
  • New Total Credit = $3.34
  • New Total Capital Required = $1,266

Buying the far out-of-money puts only dropped the credit received by $0.66. However, it reduced the buying power required by more than $17,500.

If Apple remains above $94.66 come March expiration, we will be profitable on this trade. Our maximum loss on this trade is capped at $1,266. If Apple rallies and closes above our $98 short put, we will keep the entire $3.34. However, at tastytrade, we don’t get greedy. Because this is a defined risk trade, we would look to cover at 50% of max profit or $1.67.


Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.