Neutral to Bullish Outlook & High Volatility

The big lizard is like the Jade Lizard except it basically uses a straddle for larger credit received.

Directional Assumption:  Neutral / Bullish


Setup:

– Sell 1 short ATM Straddle
– Buy OTM Call

Use on Stocks $75 or higher so I can collect more premium.

The total credit received should be greater than the width of the call spread.

When set up correctly there will be no upside risk and the total credit received is the width of the call spread.

– 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 trade moves to the call side without breaching I can close the trade for a gain.

If the stock sells off and tests the short put with greater than 21 DTE then I can roll down the call spread to collect more credit without upside risk. If less than 21 DTE then I can roll the put out in time and reestablish a new call spread.

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 25% 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): – short put strike – credit received


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