Bearish Outlook & Low Volatility

The Setup

Sell 1 OTM Put in the Front Month; Buy 1 OTM Put in the Back Month at the Same Strike Price for a net debit

Timeline

The front-month option should be at least 20 days and not more than 45 days.

Volatility

Since I am a seller of this option I will only enter the trade when IV is below 50%. Increasing IV will help this trade as inversely falling IV will hurt the trade.

Time Decay/Theta

Time decay works in my favor as long as the stock stays in its range.

Risk Management

This trade should be less than 1% of my account.

Profit Target

If my position shows a profit near 10-25% for indices or 25 – 50% for stocks and ETF’s of the max potential gain, I will close the position early to lock in profits.

Break-Even Point(s)

Varies depending on strike prices and volatility.

Categories: Strategies