Kellogg Stock Hasn't Moved Much, so Use This Strategy to Make Money – TheStreet.com

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Covered-call writing, a favorite strategy among options traders, can be expanded and given greater flexibility with the covered straddle. This expands the potential for generating current income, without adding market risk. It addresses the understandable frustrations options traders have when dealing with range-bound stock.

The covered straddle combines a covered call with an uncovered put, both of which are out of the money. It is a much more conservative strategy than a short straddle, which is “uncovered” because it is not combined with ownership of the underlying stock.

With covered straddles, it’s easy to manage risk. The risk that the short call option will be exercised is covered by ownership of the stock. The risk that the short put option will be exercised is managed by closing out or rolling the position.

Kellogg  (K) is an example of when to open and close a covered straddle. Assuming that you purchased the stock at a price lower than the strike of the short call option, you can use the covered straddle to create income while the stock is in a consolidation phase. this is demonstrated on the chart below.

From April through mid-June, Kellogg was in consolidation, trading in a narrow range between $74 and $77. The overlay of Bollinger Bands reveals that this range held steady and did not close outside the Bollinger Bands for the entire period. Once the consolidation trend was identified (by the first of May), the timing for a covered straddle was ideal. At that point, it would have been good to open a straddle with options that expired in May. These would have expired well before the stock’s consolidation phase ended.