Strategy: Sell n ITM Calls, ≤ 56 DTE
Sell n OTM Calls, Same Expiry
Buy or Own n × 100 Shares
Example:
Price Chart: Uptrending
Current IV%: ≥ 40%
IV Rank: ≤ 30
Trade: Sell an ITM call option and an OTM call option for each 100 shares of stock owned.
Typical Strike Deltas:
OTM Short Calls ≈ −0.45 to −0.40
ITM Short Calls ≈ −0.55 to −0.60
Goals: This is another premium collection strategy that relies on Theta (the daily passage of time) and the ownership of the underlying stock. This trade works best when the stock is “stuck” within a narrow price range. If the trade drops below the strike of the ITM short call option, the option premiums can be retained as profit, although the trader suffers a loss from the reduction in stock value.
Manage: This strategy collects premium by selling call options above and below the current stock price. As can be seen in the risk profile, which plots both the stock and option values, this trade has a relatively narrow profit zone comprised of the initial premium collected. The premium is highest when the option strikes remain above and below the price of the stock, that is, the ATM strike. The profit zone can be increased by increasing the strike widths, but this also decreases the amount of premium collected when entered. If the price of the underlying stock rallies and both short call options become ITM, close them immediately unless you are trading a European-style option with ample time remaining till expiration. If the price of the underlying drops and the strikes of both short call options become OTM, either buy to close them for a fraction of the original premium value collected or let them expire worthless.
Profit: If the short call options both remain OTM, either roll the short calls out and down for additional premium or let them expire worthless for a 100 percent profit.
Loss: Close if the price of the stock begins to drop and the premium of the short puts begins to increase in value for a loss. Close both positions to prevent a loss that exceeds 10 to 20 percent.