Strategy: Buy n ATM Calls, ≤ 365 DTE
Sell n ATM Puts, Same Expiry
(Longer-term expirations and even leaps options are used
to give the long calls more time to work for more profit.)
Buy n OTM Puts ≈ Delta −0.25, Same Expiry
Sell n OTM Calls ≈ Delta −0.25, Same Expiry
Example:
Price Chart: Uptrending
Current IV%: ≤ 20%
IV Rank: ≤ 30
Trade: Buy one or more ATM or slightly OTM call options; sell an equal number of ATM or slightly OTM put options.
ATM Long Calls ≈ 0.50
ATM Short Puts ≈ 0.50
OTM Short Calls ≤ −0.25 (May be closer to the ATM strike)
OTM Long Puts ≈ −0.25
Goals: Buy one or more call options on an underlying security that is trending upward. Sell a put and buy a put option (a bull put spread) to finance the premium paid for the long call option. Also sell an OTM call for additional premium. If the trade’s bullish bias is correct, this strategy can be quite profitable. While the premium of the long call options increases, the premium of the short put options decreases in value for added profit.
Manage: When the long call and short put options return an acceptable profit, and before Theta begins to erode the premium value of the long call, close the long calls for profit. If the price of the underlying drops, buy to close the short call for profit and begin selling a series of OTM short calls that expire in approximately 30 days. If the short puts are far OTM, the bull put options may either be closed for much less premium than originally received or permitted to expire worthless. If the long call is deep ITM, determine if exercising the option (receiving the intrinsic value less the remaining extrinsic value) is more profitable than simply selling the long call options for the current premium value.
Profit: Close when this trade returns a profit greater than 50 percent; long-term expirations can return profits in excess of 100 percent.
Loss: Close this trade to prevent a major loss if the price of the underlying reverses direction as a result of poor earnings or an unexpected corporate or financial sector event.