Every once in a while I have to try something new, and that means choosing something different from the menu and forgoing that same old tried-and-true sandwich.  What sandwich am I talking about?  My own trademarked "strangle sandwich, which is no one's favorite but my own.  It's a doozy; it's not for all tastes, and it might just fail and make you sick (and sorry you tried it.)  Let me tell you what it is before I tell you what I opted for instead, today:

I like premium, so I can't resist the appeal of the classic short strangle.  But who wants to lose on any spread?  This is how I have managed certain strangles in the past (and by "certain," I mean those that appeared they were going to lose me money.  I don't open them to lose money. Does anyone?)  Going short some puts and short some calls is simple, beautiful, and graceful because the option prices decline daily, your premium becomes "safe" from grabbing hands, and your account goes greener with every tick until expiration - if things go your way.  That's the dream scenario:  That your underlying goes to sleep and doesn't budge from its park bench while call buyers are crying and put buyers are fuming and their money becomes yours, more and more till the clock runs out.

But somewhere there in the middle, the middle might not stay in the middle and you might see your strikes in danger of being breached.  As the strangle seller, I have done the following:  Bought the stock as the call strike loomed near, with the intention that those shares get called away.  What a beautiful solution, right?  You still get the full premium received from both legs, and you get a bonus in the form of stock bought and then sold at a profit, as the calls are exercised.  Now, let's not get into whether I've practiced this, exactly.  I've done it, but then closed the calls way up there in the loft, and what do you think then happened to my shares?  I got out of that scrape, still for a profit, but not quite as much as I would have, had I followed the described plan.  If you try to get fancy, you have to realize you're getting chancy as well.  But back on topic:

The same thing works on the downside, as well:  You can short shares if you believe the lower strike will blow through. Have I done this?  I don't think so.  But I would, if the need arose.  What I am describing is transforming your naked calls or puts into covered calls or covered puts. Is this a fail-proof plan?  Is anything?  Well, this isn't, since you can take on the long or short shares, only to see them go the other way.  I've done this (making my short strangle into naked puts and covered calls) so few times that I can say I specifically remember it and it worked well when I did it.  But could I count on that?  Of course not.
Let's move on to the next thing on the menu I have become willing to try.  I love shorting volatility, and I need to leave a lot of unused cash to cushion that.  No position is a good one if it leaves you vulnerable to being wiped out.  So I have to be responsible and leave oceans of unused dollars serving as collateral to my short-scheming ways.  Could you blame a coyote for licking his chops, looking at all the dollars just sitting there doing nothing?  How about breaking out the cookbook (or at least the Acme catalog) and planning something new?

What to do when you'd really like to take a short position but don't want to risk being wiped out, or even if you'd just like to cap the loss you might realize?  Is it worthwhile to pay to cap that loss?  One way to do this is to simply buy calls when taking out short shares.  Today I shorted UVXY at 19.48 and bought one 19.50 strike call contract to go with each block of 100 short shares.  Now, I don't like to take losses (note the .02 difference between my shorting price and the call contract strike) and I don't like to pay for anything, so this wasn't a move I made while smirking and high-fiving myself.  In fact, I had to hold down the nausea from paying 0.98 per contract for this dubious privilege.  And I'm pretty sure I didn't construct this in nearly the best possible manner, so don't take this narration as instruction from me.  Take it as the "cry along with me" tale of how I possibly (not sure yet) messed up, but darn tootin tried, anyway.  To recap, I shorted at 19.48, which is $1,958 per block of 100 shares, and paid 0.98 per contract which is $98 to insure each 100-share block from rising to infinity or even some moderately high price and closing down my whole account in three days.  The idea is that if my short should fail, I could exercise my call and cover my short for just two cents higher than I opened it (or $2 per block of 100 shares), and I'd be out $98 per contract as well.  Not bad, I guess, and that could have been left as is.

But wait!  The story's not over.  I did bring in some salve for the burn:  .62 per contract received from selling puts at the 19.00 strike.  So there's $62 brought in per contract, and should UVXY rise (or even stay above 19) instead of fall, I can set $62 against my costs as detailed in the paragraph above.  So it looks like the worst that will happen to me is that I'll lose the $98 and the $2 and gain $62 and that comes out to booking a $38 loss per contract.  That would happen if $UVXY ends anywhere above my upper strike of 19.50.

Now, there's filling in the middle of this sandwich just as there is with the previously described strangle sandwich, although the filling isn't as delicious.  In this case it would be various degrees of disgusting (since I consider all losses unpalatable) as I might end up selling the calls for some puny price (if I hurry up and do it before they burn up at expiration) and booking an even punier gain on my short shares.  But then again, I did bring in some premium on my short puts, and I keep the full profit on that at every UVXY price over 19.00, so there's some ketchup to disguise the bad taste.  Let's take a theoretical ending price of 19.25 for UVXY on expiration day (Friday, April 21st) and compute it.  (I'm excluding commissions for ease of computation.)  The calls would expire worthless, so there's $98 gone bye-bye. The short 19.00 strike puts would expire worthless to the buyer and my entire received amount of $62 per contract would be retained by me to set against the $98 loss.  So far we're at a $36 loss per contract. I'd close my short shares for 0.23 gain per share, and per block of 100 shares that would be $23 gain. I'd be THAT close to being ahead, but would actually be $13 down, for the trouble of watching this drama unfold and end right near the bulls-eye.

If the bottom strike (the put) is breached, I'd have to buy it back to close (assuming I don't get assigned early and that I want to avoid being assigned at expiration), but of course, the more I have to pay for that, the more my short shares would be working to hand me the money needed to do that, dollar for dollar.  (Alternatively, as just mentioned, if I'm assigned long shares I could just close the position while setting the short shares against them.)  The maximum gain to me on this reverse collar would be UVXY ending lower than the put strike price of 19.00, which is the point below which I'd have to start paying something to buy the put back.  I'd make 0.48 per short share at that price and more, accordingly, at lower prices (although I'd have to spend the gain from those lower prices to defray the put-closing costs), so that after paying to close the short puts, I'd net $48 per block of 100 shares, with the long calls being lost money.  So at the worst case, I'd lose the $98 spent on calls, I'd make enough return on the short shares to offset any costs incurred in closing the short puts, so my maximum profit would be exactly as follows: The short put premium collected of $62 minus the long call premium paid of $98 plus gain made on the short shares which is capped at 48 cents per share because if UVXY ends under 19.00, any extra profit seen on those shares will be needed to pay to buy back the short puts, for a grand maximum total of $12.

I see what I could have done better.  I should have made sure the put premium received was higher, to make the risk on the top side worth my while.  In fact, a rule of thumb would be that the width between my shorting price and the put strike price, plus the premium on the short puts, should stand up against the price of the calls combined with any loss I'd take upon exercising those calls by an amount that I consider worthwhile, as compared to what I'd stand to lose, should the desired direction for the security (in this case, down for UVXY) not materialize as I wish it would.

Of course, there are various methods by which this can be closed out without waiting until the dealer gives out prizes when the hands are turned in.  I could close out any segment of this trade anytime, and reopen (or not!  See third paragraph.)  Follow UVXY this week and check back to see how I close out this clumsily-constructed first try at a reverse collar.