What are the characteristics of this option strategy?
Triple income option strategies stack three separate payments on one underlying: the premium from a cash-secured put, the premium from a call written on the shares once the put is assigned, and the dividends paid on those shares while they are held. The aim is to collect more cash over a year than a plain buy-and-hold position in the same stock. The tradeoff is that every one of the three payments depends on owning, or standing ready to own, the same shares, so the position carries the full downside of the stock, reduced only by the premiums collected.
Is this a bullish, bearish or neutral strategy?
The triple income option strategy is a neutral-to-bullish strategy, not an all-weather one. The short put, the assigned shares and the covered call all carry long exposure, so a sustained decline in the underlying produces losses on the stock that the collected premiums only partially offset.
Is this a beginner or an advanced option strategy?
The triple income option strategy is considered an advanced option strategy. It requires traders to have a comprehensive understanding of the markets and be comfortable with putting on multiple form of option trades at one time. This strategy is typically not ideal for beginners in the market as it requires complex risk management and the ability to comprehend each of the three strategies used simultaneously.
In what situation will I use this strategy?
This strategy is typically used by traders who are willing to own the underlying at a lower price and want to be paid while they wait. It suits a stock the trader is happy to hold for its own sake, in a market that is flat to gently rising, and richer premiums make it more attractive. It is not a way to trade without a direction: assignment leaves the trader long the shares, so it should only be run on names worth owning.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risk-reward ratio of the triple income option strategy is by default higher than average as it involves using three strategies concurrently. As its name implies, the goal is to collect three streams of income from a single holding rather than to trade volatility. The tradeoff is that all three legs sit on the same underlying and the same long direction, so the exposures add rather than diversify: a sustained decline produces the full equity loss on the assigned shares, offset only by the premiums collected.
How is this strategy affected by the greeks?
The greeks are key indicators used to measure the behavior of main option variables such as price or volatility. The triple income option strategy is affected by all five greeks: Delta, Gamma, Theta, Vega and Rho. Each of these greeks can affect the success of the triple income option strategy.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is usually opened at higher market volatility (VIX levels above 20), because richer premiums mean a larger credit on both the cash-secured put and the covered call. Higher volatility does not reduce the risk. The same conditions that fatten the premiums make a sharp decline in the underlying more likely, and a decline of more than the premiums collected is what turns this position into a loss.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the triple income option strategy when the trade goes against you usually means rolling the short put down and out before assignment, rolling the covered call down to collect more premium against a falling stock, or selling some of the shares outright. The mechanics are easy, because every leg is a plain vanilla option, but none of these adjustments removes the underlying problem: the position is long the stock, and rolling for credit only slows the loss.
Where does this strategy typically fall in the range of commissions and fees?
The triple income option strategy typically falls in the higher end of the range of commissions and fees compared to other types of options trades. This is because of the multiple positions being traded and the skills required to properly manage the risk associated with all of these positions.
Is this a good option income strategy?
The triple income option strategy is a strong option income strategy. It generates income from three sources on the same underlying: the premium from a cash-secured put, the premium from a covered call written on the shares once assigned, and the dividends paid on those shares while they are held. It suits traders who want steady cash flow from a stock they are willing to own outright and who accept the full downside of holding it, since the three payments cushion a decline but do not stop one.
How do I know when to exit this strategy?
Exit criteria for the triple income option strategy should be determined before entering a trade. Traders should consider their risk tolerance and the market’s current conditions when deciding how long to leave a position open. Exiting this strategy is best done with a combination of technical analysis and risk management strategies.
How will market makers respond to this trade being opened?
Market makers typically respond to the opening of the triple income option strategy in a neutral way. The legs are placed one at a time, in standard sizes, and each one is an ordinary short option that a market maker can hedge easily, so the order carries no information they have to price defensively against.
What is an example (with calculations) of this strategy?
An example of the triple income option strategy, with MSFT at $400: sell a 30-day $390 cash-secured put for $8, setting aside $39,000 per contract. If MSFT holds above $390 the put expires worthless, the $800 of premium is the whole return, and the trader writes another put. If MSFT falls below $390 the put is assigned and the trader buys 100 shares at $390, an effective $382 after the premium. Against those shares the trader writes a 30-day $410 call for $7, collects a $0.75 quarterly dividend, and can sell a further cash-secured put below the market so that a short call and a short put sit around the stock at the same time. If MSFT is above $410 at that expiration the shares are called away for $35.75 per share in total: $20 of stock gain, $8 and $7 of premium and $0.75 of dividend. The downside is the downside of the shares. The net cost basis after all three payments is $374.25, everything below that is a loss, and the loss reaches $374.25 per share if MSFT went to zero. Any additional short put doubles the exposure below its own strike, because it adds a second block of shares at assignment.
MarketXLS
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