Tutorial: "Safety Taping" Naked Positions to Bring in BPE
Example 1: Safety Taping a Short Strangle
Pictured here is a BITO short strangle that I entered on 12/8 for a 1.59 credit on buying power of 24.16. (See Post Below).
At this point, I'm considering "safety taping" the naked short strangle off to bring in buying power effect. A "safety tape" setup can also be used to offer additional protection against an outsized move to either side and therefore limit loss.
In this particular case, I'm looking to shop for cheap longs in the expiry in which my short strangle is set up. I can also do this in shorter duration (which will not give me buying power relief, but will protect me from an outsized move), the same duration as the naked, or in longer duration.
Here, I can buy cheap wings that dramatically cut that 24.16 buying power effect. The 16/55 long strangle would cost .27 to put on (as of Friday's close) and would result in a 16/25/44/55 iron condor, the widest wing of which is 11-wide. This brings in buying power effect in from 24.16 by more than half, since the maximum risk of the safety-taped setup is that of an 11-wide minus the net credit received.
Naturally, I'm paying a debit to do this, which reduces my net credit received for the setup from 1.59 to 1.59 - .27 = 1.32, but it also dramatically improves my potential ROC as a function of buying power effect from the original 6.6% at max to 13.6% at max.
Example 2: Safety Taping a Short Put
For "wheelers" (i.e., short put, acquire, cover), safety taping off short puts can also conserve buying power, particularly in a cash secured environment like an IRA.
Example:
BITO January 21st 23 Short Put
.61 Credit
Buying Power Effect: 22.39 (Cash Secured)
ROC as a Function of BPE: 2.72%
vs.
BITO January 21st 16/23 Short Put Vertical
.53 Credit
Buying Power Effect: 6.47
ROC as a Function of BPE: 8.19%
Pictured here is a BITO short strangle that I entered on 12/8 for a 1.59 credit on buying power of 24.16. (See Post Below).
At this point, I'm considering "safety taping" the naked short strangle off to bring in buying power effect. A "safety tape" setup can also be used to offer additional protection against an outsized move to either side and therefore limit loss.
In this particular case, I'm looking to shop for cheap longs in the expiry in which my short strangle is set up. I can also do this in shorter duration (which will not give me buying power relief, but will protect me from an outsized move), the same duration as the naked, or in longer duration.
Here, I can buy cheap wings that dramatically cut that 24.16 buying power effect. The 16/55 long strangle would cost .27 to put on (as of Friday's close) and would result in a 16/25/44/55 iron condor, the widest wing of which is 11-wide. This brings in buying power effect in from 24.16 by more than half, since the maximum risk of the safety-taped setup is that of an 11-wide minus the net credit received.
Naturally, I'm paying a debit to do this, which reduces my net credit received for the setup from 1.59 to 1.59 - .27 = 1.32, but it also dramatically improves my potential ROC as a function of buying power effect from the original 6.6% at max to 13.6% at max.
Example 2: Safety Taping a Short Put
For "wheelers" (i.e., short put, acquire, cover), safety taping off short puts can also conserve buying power, particularly in a cash secured environment like an IRA.
Example:
BITO January 21st 23 Short Put
.61 Credit
Buying Power Effect: 22.39 (Cash Secured)
ROC as a Function of BPE: 2.72%
vs.
BITO January 21st 16/23 Short Put Vertical
.53 Credit
Buying Power Effect: 6.47
ROC as a Function of BPE: 8.19%
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