Strategy: Buy n ITM Calls, ≤ 56 DTE
Sell n ITM Calls, Higher Strike, Same Expiry
Sell n OTM Calls, Same Expiry
Buy n OTM Calls, Higher Strike, Same Expiry
Example:
Price Chart: Neutral; may be experiencing small upward price movement.
Current IV%: ≈ 50%
IV Rank: ≈ 35 to 65
Trade: Buy n ITM call options; sell n ITM call options, higher strike; sell n OTM call options; buy n OTM call options, higher strike. (All options expire ≤ 56 DTE.)
Long ITM Call ≥ 0.55
Short ITM Call ≥ −0.50, higher strike
Short OTM Call ≤ −0.50
Long OTM Call ≤ 0.50, higher strike
Goals: An examination of the strikes of this trade and its risk profile shows how a small increase in the value of the underlying increases the net premium values of this strategy.
Manage: If the price of the underlying security increases by a few dollars, this trade can be closed for a few hundred dollars more than the premium originally paid to open it. If a month to several weeks remain and the ITM long call moves deeper ITM, the trader can retain the long call and sell an OTM call option for additional premium collection. However, Theta will increase its daily reduction of the long call’s premium value. This requires a careful examination of the premium received from a round of short OTM calls compared with the daily premium being lost by the remaining long ITM call.
Profit: Close when this strategy achieves a profit of 10 percent or more.
Loss: Close immediately if the price of the underlying begins to trend downward.