Strategy: Sell n ITM Calls, ≤ 56 DTE
Buy n OTM Calls, Same Expiry
Sell n ITM Puts, Same Expiry
Buy n OTM Puts, Same Expiry
Example:
Price Chart: Strong Directional Price Moves
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Buy n OTM call options; sell n ITM call options; buy n OTM put options; sell n ITM put options.
Typical Strike Deltas:
ITM Short Calls ≈ −0.55 to −0.65
OTM Long Calls ≈ 0.45 to 0.30
ITM Short Puts ≈ 0.55 to 0.65
OTM Long Puts ≈ −0.45 to −0.30
Goals: This trade collects premium when traded because of the two short ITM strikes. Looking at the risk profile, the puts form a bull put and the calls form a bear call, although the strikes are much closer to the ATM strike than a conventional bull put or bear call. Like the recently described long box option strategy, this strategy also favors a strong directional price move that benefits one of the long options and the opposite short option. Like the long box strategy, a price rally favors the long call and short put; a price drop benefits the long put and the short (uncovered) call. As the strike of a long option moves deeper ITM, the short option moves farther OTM. When adjusted, the resulting risk profile resembles a synthetic long stock or a synthetic short stock.
Manage: This is a bidirectional strategy that requires careful management. The best outcome is a long-term directional price move that is detected early by the trader. Once the losing options are closed, the trader must monitor the price of the underlying to ensure that the directional move continues to benefit the remaining long and short options.
Profit: If the price of the underlying continues a directional rally or drop and the losing long and short options are closed, this trade can return a profit of 30 percent or more.
Loss: If the trade is adjusted to accommodate a directional price move and the price reverses direction, close the remaining options to prevent a loss of more than 10 percent.