Could purgatory be the new paradise for Wall Street? For one group of investors, the answer is yes.
While the Dow has surged more than 10 percent from its February low, a number of the index's components are trading at the midpoint between their 52-week low and 52-week high. Moreover, despite big moves up and down, the Dow is effectively flat for the past 16 months. But that sideways action has created a perfect environment for one strategy.
On CNBC's "Options Action" Friday, Mike Khouw explained a trade structure which is referred to as selling a "strangle." The strategy, which typically is used in conjunction with a long equity position, is basically a bet that a stock will stay range bound for a particular span of time.
"The first thing you want to do is look for a stock that is stuck in a range," said Khouw. "The other thing because you are selling options you are looking to do that in a relatively short time frame. Usually I like to look for options that expire in 90 days or less," he added. "The last thing is you want to collect yields that are going to pay us for the risk we are taking."