Strategy: Buy n ATM Puts, ≤ 56 DTE
Sell 2n or 3n OTM Puts, Same Expiration
Example:
Price Chart: Downtrending off of resistance
Current IV%: ≤ 20%
IV Rank: ≤ 30
Trade: Buy n ATM put options; sell 2n or 3n OTM put options at least 1 standard deviation farther OTM depending on the strike width increments and premium values.
Typical Strike Deltas:
Long Puts ≈ −0.50 to −0.45
Short Puts ≈ 0.25 (3 to 5 strikes farther OTM depending on the strike width increments and premium values)
Goals: Keep the credit in premium received from selling the multiple short puts when this strategy is entered. A strong drop in the price of the underlying moves the long puts deeper ITM for an increase in premium and makes this trade even more profitable.
Manage: If the long put moves deeper ITM from a drop in the price of the underlying security, or even if a price rally occurs, the premium collected when this trade is entered is retained. If the price of the underlying drops to the strike of the multiple short puts, close the trade for the profit as the price approaches the peak of the risk profile’s plotline. If a price drop exceeds the strike of the short put options, close the trade before it begins to lose. Do not let the short puts expire ITM. This trade includes uncovered short calls requiring the trader to have the highest option trading level.
Profit: Close when this trade returns a profit that is greater than or equal to 30 percent.
Loss: Close this trade when the underlying is close to the strike of the OTM short puts.