These notes are what I took regarding a video presentation from a very helpful trader, Tammy Chambless, in the TastyTrade Options group found on Facebook. This is not a new strategy, but her presentation was well put together. All screenshots are from her presentation. All credit is given to her for her work. For the full video and her more detailed notes, I would suggest you join the FB group “TastyTrade Options” and find it there. Any losses I incur, I am responsible for 🙂

Here are the stats for the ongoing study I am doing on this strategy.

Directional Assumption: 

Neutral, Bullish, or Bearish

This trade is put on using the SPY or SPX indices.

Enter Trades on Monday, Wednesday, or Friday at the beginning of the day for trades that expire that day.

I like to Check the futures to see which direction the indices may be heading at the open in order to place a put spread, call spread, or both.

When to Run It

I am anticipating a decrease in extrinsic value from the open of the market to the close of the market that day from credit spreads that expire the same day I open them.

I typically do not enter during the first 30 minutes of market open because volatility is choppy at the open and there is more of a chance that I will get stopped out. Wait until the market settles and finds a direction.

The trade off with waiting is that I may lose premium.

Setup

  • Sell a short Verticle Spread for a credit
  • the short leg should be +-5 delta
  • the long leg should be 50 points or further OTM.

The long OTM options are used to reduce the buying power required, not to limit risk. I want to minimize the cost of the long leg so I can collect more premium.

I have found that selling the long OTM where the bid is .05 has been getting me faster fills.

Timeline

0 DAY

Ideal Implied Volatility

The greater the volatility the better credit price you will receive.

Profit Target

Winner : let the options expire otm for a 100% profit or close out before the end of the options trading day.

Loser: I will close the position at 2 x’s the credit recieved if it moves against me.

Note: This is a set it and forget it play using stops/limits.

Both my tasty works and Etrade accounts have this ability. I usually just place the stop/limits on the short leg and let the long leg expire or try to sell it to get my .05 cents back.

Time Decay

As time goes by during the day theta works in my favor, ideally rendering the option worthless.

Maximum Profit

Potential profit is limited to the net credit received.

Maximum Loss

A stop will be put in place so that the maximum loss will only be 2 times the credit received.

Risk Management

Use only 1-2% of my total protfolio to make this trade. Do not use more than 50% of my account’s maximum buying power.

Set stop using only the short leg because it is easier to get out of.

Ideally you want to take the trade to expiration. But in
this higher volatility market with big swings at the
EOD, it’s best to exit early.

If you get stopped out on the short leg, you can decide
whether you want to close the long leg or just let it
expire.

If you get stopped out, you may be able to re‐enter
using further OTM options to recoup some of the loss.

Categories: Strategies