A Five-Day Short Strangle for a Quick Free $900

Today, I’m going to make $900 appear out of thin air.

If you look at the line graph for AOL, you’ll see that the stock has been stable since the beginning of the year. From February to now, the stock has been stuck between 40 and 45 a share. As this stock appears to be quite stable, it is suitable for running a short strangle.

The Candlesticks and Technical Analysis for America Online

What we are looking for here is nothing! Before you run a short strangle, you want to make sure that nothing strange has happened with the stock in the past few days or weeks. AOL has no significant candlesticks, gaps or short-term trends. In the long-term, short-term and mid-term, AOL has been pretty much flat, showing a stable stock price of around $43.

To be super careful and conservative before running a short strangle, you might consider checking the upcoming news about AOL. You might also want to check for any future dividends, which might affect the stock. However, I am running a pure technical analysis for two reasons: to save time (I am a full-time freelance copywriter and marketing consultant by trade and simply don’t have the time to spend researching stocks) and because I believe that all the publicly available information in the stock is already reflected in the stock price (for example, if dividends were coming up, the stock price should have risen slightly, signifying that).

My Prediction for AOL

Looking at the trends, supports and resists for AOL, it’s quite clear that AOL is most likely to stay between the values of 40 and 45. This trend has held for around 3 months and is likely to continue.

My Move | AOL Short Strangle

I’m going with a Short Strangle on this stock. In a short strangle, you sell out-of-the-money calls and puts so as to collect two sets of premiums. Then, you just wait it out until the calls and puts expire. If the stock stays between the two values you’ve guessed it will stay between, you keep the premium. However, if the stock moves over one of those two values, you could lose a significant amount of money. But if you choose a stable stock, that risk is quite low, and is one I’m willing to take in this case.

Because I believe AOL will stay between 40 and 45 for awhile, I will sell calls at 45 and puts at 40. I have decided to buy options that will expire on May 9, limiting the time at which I am at risk (though this also decreases the value of the premium, but I can fix that by selling more option contracts). So, I will sell 10 contracts total and wait until the end of the week. If in the next 5 days, AOL doesn’t go too high up or down, I’ll keep my premiums.

AOL Short Strangle

Profit on sale of 5 calls at 45: $550

Profit on sale of 5 puts at 40: $350

Net profit of short strangle: $900