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Directional Assumption

Bullish to Neutral

Selling the put obligates me to buy stock at the strike price if the option is assigned.

When to Run It

I am anticipating that the price of the underlying stock goes up.

If the price of the stock goes down and I am assigned then I own the stock and long in the position.

Setup

  • Sell OTM Put
  • 70% or greater Probability of Profit

NOTE: Both options have the same expiration month.

Timeline

30-60 days

Ideal Implied Volatility

** 50% or greater**

Short puts allow me to capitalize when anticipating a decrease in
implied volatility (IV).

Profit Target

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

Loser: I will simply be assigned the stock and own it for a long position or can sell it for a potential loss.

Time Decay

As time goes by theta works in my favor as I collect premium as long as the price stays above the strike price.

Maximum Profit

Potential profit is limited to the net credit received.

Maximum Loss

This is a defined risk trade.

The Breakeven is the Strike price minus the net credit received.

The max loss is the price of the stock that is assigned at the strike price minus any credit recieved.

Risk Management

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

  • Adjustments if needed:
  • Roll the option out
  • Define risk by creating a spread

Tip

It may be best to use a strike around one standard deviation out-of-the-money at initiation. That will increase myrobability of success.

However, the lower the strike price, the lower the premium received from this strategy.

I may want to run this strategy using index options rather than options on individual stocks. This is because indexes typically are not as volatile as individual stocks.

Categories: Strategies