![]() ![]() ![]() Some evidence also indicates SEC's reforms may have contributed to the runs. For example, prime MMFs-which can invest in all types of short-term debt instruments-held by institutional investors experienced net redemptions of about 30 percent of their total assets in a 2-week period in March 2020 (see figure). If these liquidity levels fell below the minimum, SEC allowed certain MMFs to charge investors a liquidity fee for redeeming shares or to impose a redemption gate to temporarily suspend redemptions.Įvidence indicates that SEC's reforms did not prevent runs during the COVID-19 pandemic. For example, SEC required MMFs to hold minimum levels of liquid assets that they could sell to meet redemptions. One last item: Since this position includes two short option positions, make sure you are approved for this type of trade before trying to place it.īy Michael Thomsett of ThomsettOptions.In 20, the Securities and Exchange Commission (SEC) revised its money market mutual fund (MMF) rules after some MMFs experienced runs (heavy redemptions) during the 2007–2009 financial crisis. Also make sure you have the equity to meet margin requirements, which are equal to 100% of strike value. If you’re going to do short straddles, keep them within sight of expiration and be willing to accept the risks. As long as the market value is within the profitable point range above or below the strike, exercise is still profitable.Įven though these numbers look like the idea can work out, remember the one rule about short combinations: Even when they work on paper and even when they should work in practice, they can also go wrong, expensively and quickly. You are willing to get exercised as long as it nets out to a profit for you. The attractive shorts usually have a correspondingly expensive long, so covering with long options is not the best way out of the straddle.Ħ. You can cover with stock or long options, although that’s an expensive proposition. You also can cover the short call or put if circumstances make it necessary. Ideally, the stock price will not change much, so time decay could make both sides work profitably.ĥ. The forward roll might become inevitable for one side depending on direction of price movement. Or, if intrinsic value moves too quickly, you plan to roll forward (up in strike with the short call or roll down with the short put) and duplicate the strategy. You plan to close both sides once time decay starts to hit. You can also roll out to a later expiration to avoid exercise.Ĥ. A slight move often is offset by declining time value, so even unfavorable moves can be countered with a profitable close. Plan to close positions as soon as possible, especially those moving in the money. Keep an eye on the strike versus current price. Try to limit short straddles to very short-term options, because time decay will be rapid in the final month.ģ. Expiration takes place in one month or less. The best short straddles (a short straddle is selling a call and put on the same underlying, same strike and same expiration) are those that, given the at-the-money or near-the-money conditions, offer overall very rich premium.Ģ. Consider how much risk is reduced in the following circumstances:ġ. Making things even riskier, one side or the other is always in the money.Įven so, the true risk of the short straddle might not be as severe as traders often assume. The short straddle is dangerous because, well for one thing, both sides are short. Even though the short straddle has a reputation for being an extremely risky strategy, the risks are not as bad if you know what you’re doing, says option expert Michael Thomsett of. ![]()
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