Strategy: Sell n ITM Puts, ≤ 56 DTE
Buy n ATM Puts, Same Expiry
Buy n OTM Puts, Same Expiry
Example:
Price Chart: Downtrending Preferred
Current IV%: ≥ 40%
IV Rank: ≤ 30
Trade: Sell n ITM put options; buy n ATM put options; buy n OTM put options.
Typical Strike Deltas:
ITM Short Puts ≈ 0.55 to 0.65
ATM Long Puts ≈ −0.50
OTM Long Puts ≈ −0.40 to −0.35
Goals: This strategy favors a strong downward price move in the underlying security that can return unlimited profit. A rally can also achieve a limited profit. The worst case is when the price of the underlying remains within a narrow range.
Manage: This strategy includes a bull put and a farther OTM long put that adds cost. Selling the ITM puts offsets the premium paid for the two long puts. Carefully watch this trade. If the underlying rallies, sell the calls and keep the short put if it moves OTM. The best case is a strong price drop that moves both of the long puts ITM. If this happens, buy to close the short put to prevent its premium from rising. Keep the long puts until Theta begins to erode their premium values for profit.
Profit: If the price of the underlying rises to $14, which is a 10 percent increase, this trade can achieve a $500 profit. If the price drops substantially below $10, the profit can be substantial. However, this requires an unusually large move for a $12.69 stock.
Loss: If the price of the underlying drops by $1.00, the trade can lose $500, which is the maximum amount it can lose.