Debt Ceiling Debacle Sets up Well for a Strangle

A strangle is an options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset. This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.

There will probably be no deal tonight or Friday on the debt ceiling negotiations.  If we don’t see a bill to extend the debt ceiling over the weekend, the market is going to go down hard on Monday in my opinion.  If we do see a deal over the weekend ,then there will be a sharp rally on Monday.  You won’t be able to put this position on Monday if it pans out as described here because the futures markets will open up Sunday afternoon and determine the action for Monday.

I  would go out and buy September puts and calls on the S&P Depository receipts to buy yourself some time if this doesnt’ play out as quickly as I expect.  Also I wouldn’t be surprised that if the market sells off sharply on the lack of a deal, it will rally back soon as people anticipate that one will arise.  In this case sell the puts for a handsome profit and hold on to the calls for the rally back to salvage your returns.  Of course its possible to make money on both sides of the trade but unlikely.  On the other hand, there could be a sharp relief rally and the market rises and your calls go up in value.  You may sell them and hold onto the puts in anticipation of a pull back where you can salvage some remaining value.

Buying options is usually a waste of money.  I much prefer to sell them but rarely do I sell Index options.  I generally only sell puts on stocks I would be willing to buy if they dropped to my strike price.  I also never go further out than the current month.