Strategy: Buy n OTM Calls, ≤ 14 DTE
Sell n ATM Calls, Same Expiry
Sell n ATM Puts, Same Expiry
Buy n OTM Puts, Same Expiry
Example:
Price Chart: Sustained directional trend; currently basing
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Buy n OTM put options; sell n ATM put options; buy OTM call options; sell OTM call options, all expire within 7 to 14 days.
Typical Strike Deltas:
Short Calls ≈ −0.50
Long Calls ≈ 0.45
Short Puts ≈ 0.50
Long Puts ≈ −0.45
Goals: Collect premium from the ATM options sold less the OTM options bought. Carefully manage this trade and close it for profit.
Manage: Several option traders enter this trade each Monday and Wednesday using SPX options that expire in 2 days. The trade is often closed for a 10 percent profit within a matter of a few hours following trade entry. Regardless of the financial instrument or time till expiration, monitor the price of the underlying; buy to close the ITM short options and sell the OTM long options as the remaining long option moves deeper ITM and the remaining short option moves farther OTM. Close as soon as an acceptable profit is achieved, which can range from hours to a day.
Profit: Close when this trade returns a profit of 10 to 15 percent.
Loss: Close the two remaining options for a small loss if the price of the underlying reverses direction.