Neutral to Slightly Bearish Outlook & High Volatility
Directional Assumption: Neutral to Slightly Bearish
– Buy an ATM or OTM put option
– Sell two further OTM put options at a lower strike
Timeline: 45 days
Ideal Implied Volatility Environment: 50% or greater.
Profit Target: 25% – 50% of the maximum profit.
The beauty of this trade is that if I am directionally wrong, it doesn’t matter if my spread expires OTM as long as I collect a credit – that will then be my profit. I route front-ratio spreads as a means to get into a long or short stock positon with a very beneficial breakeven point. I tend to use these strategies if I have a price target in mind for the underlying. I will usually place my short strike at that target, as that would yield max profit at expiration if the stock ends up there.
Time Decay/Theta: Time works in my favor.
Risk Management: This trade can be scaled up to 3-5 % of my account.
When the debit spread portion of the trade can be closed for near max profit, the debit spread portion can be sold while holding the additional short option. If I want to extend duration on the position, the short option can be rolled to the next month.
Max Loss / Break Even: Short call strike + max profit potential