Neutral to Bullish Outlook & High Volatility

Directional Assumption:  Neutral / Bullish

Setup: – Sell OTM Short Put
– Sell OTM Vertical Short Call Spread

you want at least 30 cents on a call spread and 70 cents on the short put.

– Can use around earnings

The trade is suitable for stocks that have sold off and have a high implied volatility rank. This allows for more premium to be collected while having no upside risk if the underlying trades through the short call spread.

Timeline:- Around 45 days is the sweet spot. This gives enough time for theta to work out.

Ideal Implied Volatility Environment: 50% or higher IV. When IV is high, I want to sell vertical spreads hoping for an IV contraction.

Max Profit:  Credit received from opening trade. Max profit is realized when the stock price is between the short strikes at expiration.

Max Loss: 

– Downside: Strike Price of short put – credit received

When set up correctly, we have no risk to the upside.

If the stock sells off and tests the short put, the short call spread can be rolled down to collect more credit without increasing the upside risk.

In the worst case scenario, a trader can close the entire position for a loss if the loss on the short put becomes too large.

Time Decay/ThetaIt will erode the value of the option I sold (good).

Profit Target: If my position shows a profit near 50% of the max potential gain, I will close the position early to lock in profits.

Risk Management: This trade can be scaled up to 1-2 % of my account.

Break-Even Point(s): – Downside: Strike Price of short put – credit received

Categories: Strategies