Every Options Strategy (and how to manage them) | Iron Condors, Vertical Spreads, Strangles
Summary
TLDRThe script outlines an options trading strategy series, detailing eight common strategies used by traders, including short vertical spreads, long vertical spreads, iron condors, diagonal spreads, short strangles, short puts, short straddles, and ratio spreads. Each strategy is discussed in terms of setup, managing winners, losers, and situations in between. The series emphasizes the importance of adjusting trades based on market conditions and the implied volatility rank (IVR), aiming for risk management and maximizing profits.
Takeaways
- đ Understanding and managing options strategies is crucial for successful trading, with eight common strategies being the focus of the series.
- đ Successful traders are prepared to make necessary adjustments to their strategies when market conditions change.
- đŠ Short vertical spreads are a defined risk trade suitable for beginners, offering peace of mind with a known worst-case scenario.
- đ Profit targets for short put and call spreads are typically set at 50% of maximum profit for effective management of winners.
- đ« When managing losers in short vertical spreads, rolling the position out to the next monthly cycle can be a viable option if it can be done for a credit.
- đ For long vertical spreads, managing winners is straightforward, but losers require patience and may involve rolling out the position if within 21 days to expiration.
- đ© Iron condors are neutral strategies benefiting from minimal stock movement, combining two out-of-the-money short vertical spreads for potential profit.
- đ Diagonal spreads are a hybrid strategy with both directional and time components, offering benefits from stock movement and the passage of time.
- đž When setting up a diagonal spread, avoid overpaying and aim to collect a debit that is no more than 75% of the spread's width for optimal risk-return balance.
- đ In undefined risk strategies like short strangles, managing winners involves taking profits at 50% of maximum profit, while losers require careful adjustment protocols.
Q & A
What is the primary focus of the options trading crash course strategy series?
-The primary focus of the options trading crash course strategy series is to educate traders on managing trades using eight common strategies in the options world, emphasizing the importance of making necessary adjustments to those strategies.
Who is the presenter of the options trading crash course strategy series?
-Jim Schultz is the presenter of the options trading crash course strategy series.
What are the three key aspects covered for each strategy in the series?
-For each strategy in the series, the key aspects covered are managing winners, managing losers, and managing the dance floor (situations that are neither clear wins nor losses).
What is a short vertical spread, and why is it recommended for beginner traders?
-A short vertical spread is a defined risk directional trade that involves selling one out-of-the-money option and buying a further out-of-the-money option. It is recommended for beginner traders because it provides a strong sense of security by defining the worst-case scenario on order entry.
How should traders manage their winners and losers in short vertical spread trades?
-Traders should manage winners by setting profit targets at 50% of maximum profit and manage losers by considering a roll out to the next monthly cycle at 21 days to expiration, ensuring to do so for a credit to avoid adding risk to the trade.
What is an iron condor, and how is it set up?
-An iron condor is a neutral strategy benefiting from minimal stock movement, constructed from two out-of-the-money short vertical spreads: a short put spread below and a short call spread above the current stock price. The ideal entry is to collect about one-third the width of the strikes from both spreads.
What are the key considerations for managing an iron condor?
-Key considerations include taking the trade off at 50% of maximum profit for winners, rolling for a credit at 21 days to expiration for losers without changing strikes or adding units, and using the implied volatility rank (IVR) as a guide for mid-situation adjustments.
How does a diagonal spread set up, and why is it preferred in low IV environments?
-A diagonal spread is part vertical spread, part calendar spread, involving buying a back month option a couple of strikes in the money and selling a front month option a couple of strikes out of the money. It's preferred in low IV environments for its flexibility and adaptability.
What is the strategy for managing winners and losers in diagonal spreads?
-For managing winners, set profit targets at 50% of maximum profit. For losers, consider rolling the short option forward to a weekly cycle for a mini diagonal spread, roll forward and adjust the short strike to shrink the spread, or convert into a vertical spread in the back month.
Why is the ratio spread considered the most versatile and flexible strategy?
-The ratio spread is considered the most versatile and flexible due to its structure of one long option paired with two short options, allowing for profit potential in both directions and significant flexibility in adjustments and management of the trade.
Outlines
đ Introduction to Options Trading Strategies
Jim Schultz introduces an options trading crash course, focusing on eight key strategies used by successful traders. Emphasizing the need for quick and effective strategy adjustments, the course begins with a look at the short vertical spread. Key aspects like managing winners, losers, and complex situations ('the dance floor') are highlighted. The strategy is described as a beginner-friendly, defined-risk directional trade, with an emphasis on understanding trade mechanics and setting up trades by selling one out-of-the-money option while buying another further out. Collecting one-third the width of the strikes is advised for a balance in risk-return.
đ Detailed Overview of Short and Long Vertical Spreads
This section delves into managing short vertical spreads, focusing on setting profit targets and adjusting losing positions. For long vertical spreads, the approach is similar but with closer at-the-money strikes for the long and short options. Again, managing winners involves setting profit targets, while managing losers involves patience, without additional adjustments. The segment concludes with the importance of saving the video for reference and an introduction to the next topic in the series: iron condors.
đ Exploring Iron Condors and Managing Different Scenarios
Iron Condors are presented as a neutral strategy, built from two out-of-the-money short vertical spreads. The segment emphasizes the importance of collecting one-third the width of the strikes from both spreads and managing winners at 50% of max profit. Losers are managed based on the width of the Iron Condor, with narrow spreads being treated like defined risk strategies and wider spreads more like strangles. The importance of monitoring implied volatility rank (IVR) is also stressed for decision-making in uncertain 'dance floor' scenarios.
đ Strategies for Diagonal Spreads in Low IV Environments
The diagonal spread is introduced as a favorable strategy in low implied volatility environments, combining elements of vertical and calendar spreads. Focusing on the flexibility of this strategy, it's explained that these debit strategies use call or put options based on the market bias. Key setup steps include choosing strikes and ensuring not to overpay for the spread. Managing winners follows the familiar pattern of targeting 50% of max profit, while losers and uncertain scenarios offer various adjustment options like rolling the short option or converting to a vertical spread.
đĄ Mastering Short Strangles in Undefined Risk Categories
The short strangle, an undefined risk strategy involving two out-of-the-money options, is introduced. Key setup elements include choosing high implied volatility rank (IVR) environments and ensuring significant premium collection. Management strategies for winners follow the 50% max profit rule, but losers require a multi-step adjustment process, including reducing delta exposure and possibly going inverted. The final decision-making often depends on the relationship between collected credits and the inversion width, with IVR also playing a crucial role in intermediate scenarios.
đ Handling Short Puts and Adjustment Strategies
This segment focuses on the short put strategy, emphasizing the benefit of choosing out-of-the-money strikes. Winning short puts are managed by targeting 50% max profit, while losers are handled by rolling out in time or adding a short call to create a straddle. The segment also covers severe scenarios, suggesting going inverted with strangles and setting exit points based on multiples of credits received. For intermediate scenarios, IVR is once again used as a guide for decisions.
đ Comprehensive Guide to Managing Short Straddles
Short straddles, involving two options with the same strike, are discussed. These strategies focus on maximizing extrinsic value and are managed differently from other strategies, targeting 25% max profit due to their at-the-money position. Adjustment strategies for losing straddles include rolling out or going inverted, with decision-making influenced by the duration remaining in the cycle. The guide emphasizes the importance of the relationship between credits collected and the width of any inversion.
đ Final Overview of Ratio Spreads and Their Flexibility
The series concludes with ratio spreads, highlighting their versatility. This strategy involves one long option and two short options, resulting in a net credit strategy. The segment explains the setup, including the importance of not overpaying and preferring puts over calls. Winner management is focused on collecting most of the credit, while loser management depends on the stockâs movement relative to the short strike. The segment advises on adjusting ratio spreads, emphasizing the significance of collected credits and suggesting the use of IVR in uncertain scenarios.
Mindmap
Keywords
đĄOptions Trading
đĄShort Vertical Spread
đĄManaging Winners
đĄManaging Losers
đĄIron Condor
đĄImplied Volatility Rank (IVR)
đĄDefined Risk
đĄDiagonal Spread
đĄShort Strangle
đĄRatio Spread
Highlights
Options trading strategies are essential for managing trades and adjusting when necessary.
There are eight key strategies used by most successful traders in the options world.
Short vertical spread is a defined risk directional trade suitable for beginners.
Managing winners in short vertical spreads involves setting profit targets at 50% of max profit.
For losers in short vertical spreads, consider rolling the position out to the next monthly cycle if 21 days remain.
Implied Volatility Rank (IVR) can guide decisions on whether to keep or close a position.
Long vertical spreads are set up similarly to short vertical spreads but with strikes closer to at-the-money.
Managing winners in long vertical spreads involves taking profits at 50% of max profit.
Iron Condors are neutral strategies that benefit from minimal stock movement.
Diagonal spreads are a hybrid strategy with both directional and time components.
Short strangles are simple undefined risk strategies with high IVR environments.
Short puts allow for making money even if the stock falls, as long as it stays above the short strike.
Short straddles involve selling a put and a call with the same strike, maximizing premium collected.
Ratio spreads are versatile strategies with one long option and two short options, offering potential profits in both directions.
Managing winners in ratio spreads requires discretion and focusing on the stock rallying scenario.
For losers in ratio spreads, check the value of the vertical spread and manage the remaining short put accordingly.
The option crash course strategy series covers a range of strategies from defined risk to undefined risk positions.
Transcripts
if you're not ready to manage your
trades then you're trading wrong in the
options World there are eight strategies
that most Traders use and the successful
Traders they stand ready to make the
necessary adjustments with those
strategies when they need to be made it
doesn't take more than a couple minutes
to follow these mechanics and I promise
it will make all the difference in your
Trading
so welcome to our options crash course
strategy series I'm Jim Schultz I'm
going to be your tour guide for this
series first up on the docket we are
going to cover the short vertical spread
and what we want to do is we want to hit
three things we're going to hit these
three things across each and every
strategy within this series we're going
to talk about managing winners we're
going to talk about managing losers and
then we're going to talk about managing
the dance floor but before we get to all
that let's remind ourselves what a short
vertical spread
is okay so a short vertical spread this
is a defined risk directional trade and
this is a great option for a beginner
Trader who's looking to you know
understand the T mechanics kind of get
their feet wet in the world of options
trading because it's a very very strong
thing with a ton of Peace of Mind to
know what your worst case scenario is on
order entry but how do we set these guys
up well they all set up basically the
same you sell sell one out of the money
option and then you buy a second further
out of the money option by buying that
second option that is the thing that
puts the safety net in place as a
reference point we typically like to
collect around onethird the width of the
strikes so if it's a $2 wide vertical
spread we'd collect about 67 or. 70
cents if it's a $3 wide vertical spread
we'd collect around a dollar we feel
that this is a great risk return balance
and a risk return turn trade-off that
sets us up in a nice high probability
situation okay easy enough but once you
put this thing on how do you manage it
well first up managing those winners
right the easy stuff the fun stuff you
put on a short put spread and the stock
goes higher that thing's going to manage
itself that thing is not going to be
difficult to handle because it's going
to be an easy winner it's going to be a
fun time you put on a short call spread
and the stock goes lower that is also
going to be a fun time that is also
going to be an easy trade you set your
profit targets at 50% of Max profit for
either this short put spread or this
short call spread and if the stock
accommodates you man you just take it
off you move on you find another
opportunity don't overthink it okay so
now for the not so fun stuff how do you
manage your losers what do you do when
the position is a loser and the stock
isn't accommodating you thankfully
though this situation is actually pretty
simple too if you get to 21 days to to
go then look to roll this thing out to
the next monthly cycle don't change the
strikes and don't add units just pick
this guy up move it out to the next
cycle and drop it down at 21 days to go
however what you want to make sure that
you can do is roll forward for a credit
you don't want to pay a debit to roll
your position because this would add
risk to the trade so if you can roll
forward for a credit at 21 days to go
then by all means do so but if you have
to pay a debit which will be the case if
the position is too far gone then you
have to sit and wait right we control
our size on order entry so in the event
that this does happen it's something we
are ready and willing to absorb and to
be perfectly honest this is going to
happen to you a time or two or 10 or 20
over your trading career it's a
probabilistic certainty but remember as
high probability Traders this is not
going to be the most likely outcome we
are most likely going to be managing our
winners all right so now we know how to
manage winners with short vertical
spreads we know how to manage losers
with short vertical spreads but what do
we do with everything in between right
what do we do with all those Dance Floor
situations where we're at 21 days to go
maybe we have a scratch maybe we have a
small winner maybe we have a small loser
right how do I know how to handle that
situation well I'm not even going to
pretend that this is going to be an
exhaustive list for how to handle those
situations but here is something that's
a really good sound strategic way to
approach these situations look at the
ivr on the trade look at the implied
volatility rank if the ivr is still
elevated right the ivr is still high
like it was when you put the trade on
then consider keeping it on because you
know the implied volatility is a mean
reverting entity and if it does indeed
mean revert and come back down then
that's going to help you reach your
profit Target if on the other hand ivr
has collapsed then it might be time to
take that tradeoff whether it's a small
winner a small loser or a scratch it
might be the best move to just close the
trade move on and find something else so
there you have it man that is how to
manage a short vertical spread be sure
to save this video for reference and
when you are ready check out the next
video inside of this crash course
strategy series long vertical
spreads we are going to cover the long
vertical spread and we're going to
follow the same framework that we
followed for the short ver vertical
spread we're going to talk about
managing winners we're going to talk
about managing losers and we're also
going to talk about managing that dance
floor all that stuff kind of in between
so first let's begin with how a long
vertical spread sets
up all right so a long vertical spread
it's going to set up pretty similarly to
a short vertical spread where you're
going to have a long option and you're
going to have a short option but their
exact placement that's going to be a
little bit different right remember with
a short vertical spread we focus
primarily on out of the money options
well with a long vertical spread we're
actually going to be closer to at the
money with our strikes we're going to go
a little bit in the money with our long
strike and a little bit out of the money
with our short strike basically
straddling the current stock price with
this strategy we like to be around the
at the money strike for the following
reasons we don't want to move too far
out of the money because that's going to
be a low probability trade right and
even though we're buying premium we
still want to be aware of the
probability on this trade we also don't
want to move too far in the money
because that will not be a great risk
return tradeoff for this type of
strategy all right so that's how a long
vertical spread sets up now the fun
stuff let's talk about managing those
winners right you have a long put spread
on and the stock goes down that's going
to work out pretty well you have a long
call spread on and the stock goes up
that's also going to work out pretty
well you set your profit Target at 50%
of Max profit when it gets there you
take it off you move on you find another
opportunity all right easy enough man
those winners they're gonna pretty much
take care of themselves but what about
the not so fun stuff the losers right
what do you do when this trade moves
against you what do you do when the
stock doesn't cooperate well to put it
very simply nothing you sit and you wait
sure if you can roll out at 21 days to
go and you can do so for a credit then
you should do that
but if you can't if the strategy is too
far gone and the stock has just not come
back to you you have to sit and wait
remember we control our position sizing
on order entry so if it takes the whole
cycle for this thing to come back then
it takes the whole cycle for this thing
to come back if it never comes back then
it never comes back with our defined
risk positions especially something like
a long vertical spread if the stock
doesn't cooperate then you just have to
do nothing all right so that is it that
is how you manage a long vertical spread
again be sure to save this video for
future reference and then when you are
ready I will see you in the next video
where we are going to talk about iron
Condors in this video we are going to
cover the iron Condor and we are going
to follow the same framework the same
protocol as we've already done we're
going to talk about managing winners
we're going to talk about managing
losers and then we are going to talk
about managing everything in between so
let's begin with how to set up an iron
Condor all right so an iron Condor is a
neutral strategy that benefits most from
a stock that doesn't move too much it is
built from two out ofthe money short
vertical spreads you have a short put
spread below the current stock price and
you have a short call spread above the
current stock price your best case
scenario is both of those spreads stay
out of the money both of those spreads
are moving moving towards expiration
where they won't be worth anything now
on Entry we like to collect about oneir
the width of the strikes the short put
spread and the short call spread have
the same width so it doesn't matter
which one you choose but similar to a
short put spread or a short call spread
we're looking to collect about onethird
that width of the strikes Now with an
iron Condor it's Unique because you have
two spreads so you don't need to collect
onethird of the width of the strikes
from from one spread you need to collect
onethird the width of the strikes from
both
spreads all right so that's how an iron
Condor sets up but now the fun part how
do you manage those winners it's
actually going to be very similar to
what we saw with our short vertical
spreads whether it be a short put spread
or a short call spread we're going to
Target 50% of Max profit so what that
means is if you sell an iron Condor for
a dollar you're looking to buy buy it
back for 50 if you sell an IR Condor for
A180 you're looking to buy it back for
90 it really is that simple take these
guys off once they reach 50% of Max
profit and don't look
back all right easy enough what about
the not so fun part what about these
losers when the stock moves up
significantly or the stock moves down
significantly well what you're going to
want to do is largely going to be driven
by the width of the iron Condor so let's
start with the more narrow guys you know
your $3 wide iron Condors your $5 wide
iron Condors you can treat these very
much like you treat every other defined
risk strategy you can pretty much just
sit and wait you control your risk on
orderer entry and then at 21 days to go
if you can roll for a credit then you do
so if you have to pay a debit then you
sit tight and you do nothing this is
absolutely a viable alternative with
these Nar nrow iron Condors now to be
fair you could also roll the untested
side so if the stock moves up a lot you
could roll the put spread up if the
stock moves down a lot you could roll
the call spread down that is going to
bring in a credit and it will reduce
your risk but you have to be aware it's
also going to shrink that region of
profitability it's going to make it more
difficult to be profitable on this trade
because there's simply less distance
between the two short strikes now and
there's already a tremendous amount of
friction
between the short options and the long
options all right so that's how you
handle the narrow iron Condors but what
if you have a wider iron Condor what if
you have an iron condo that's you know I
don't know $10 or $15 or $20 wide well
this is actually going to behave a lot
more like a short strangle which we're
going to see in a future video inside of
this series even though the risk is very
much defined because you have so much
distance between the short option and
the long option these guys are going to
behave a lot more like a strangle so so
it's probably prudent to roll that
untested side when one of your sides
gets tested because you have so much
additional distance between the shorts
and the Longs there isn't going to be as
much friction as you would have with a
more narrow iron Condor so what this
means is you will be able to reduce your
risk you will be able to bring in more
credit and you won't shrink your chances
of being profitable on the position like
you might with a $3 wide or a $5 wide
iron condor okay so that's how to handle
the winning iron Condors that's how to
handle the losing iron Condors but what
about all the iron Condors that are kind
of like eh not really a winner not
really a loser you get to 21 days to go
and they're pretty much a scratch well
this is going to be largely up to your
discretion as a Trader but here is a
good reference point to use the same one
that we used with our short vertical
spreads look at ivr look at the implied
volatility rank if it's still elevated
like it was when you put the trade on
then consider keeping it on but if it
has collapsed if it has come in a little
bit then you might want to consider
taking it off following ivr and using it
as your reference point here really
allows you to take advantage of any
volatility mean reversion that might
indeed take hold all right guys that is
it for the iron Condor save this video
for future reference and hey share it
with a friend right share it with one of
your Trader friends that's trying to
learn about iron condors and when you
are ready I will see you guys in the
next video inside of this series The
diagonal
spread we are going to cover the
diagonal spread now guys this is
probably my favorite low IV environment
strategy the flexibility the
adaptability is second to none so let's
follow the same structure as what we've
done so far let's talk about Winners
let's talk about losers and let's talk
about everything in between but before
we do let's remind ourselves how a
diagonal spread sets
up
all right so how does a diagonal spread
set up well first let's remember that a
diagonal spread it's kind of a hybrid
strategy it is part vertical spread and
it is part calendar spread so you have
both a directional component and a Time
component what that means is if you get
the stock move that you want then you
can get paid very quickly it also means
that you can benefit from the simple
passage of time now our diagonals are
always debit strategies so what they
that means is this if you are bullish
you want to use call options if you are
bearish you want to use put options and
the way it sets up is as follows you
want to go into the back month and you
want to buy an option that is a couple
strikes in the money then you want to
step into the front month and you want
to sell an option that is a couple
strikes out of the money now that's
probably about as clear as mud so let's
work through a couple of examples let's
suppose that you are bullish on Apple
and and apple is currently selling for
$130 the front month is February and the
back month is March what you might want
to do is go into March and buy the 128
stri call that's a couple strikes in the
money then you go back into February and
you sell maybe the 132 strike call that
is a couple strikes out of the money
this would give you a $4 wide diagonal
spread or let's say you're bearish on
the overall Market let's say you're
bearish on the SP y spy is at
$350 the front month is still February
and the back month is still march the
way you could set this guy up would be
going into March and buying maybe a 353
put that is a few strikes in the money
then you step into February and maybe
you sell the 348 put that is a couple
strikes out of the money here you would
have on your hands a $5 wide put
diagonal spread either way guys call
diagonals put diagonals upside downside
bullish spis I don't even care about any
of that here is the most important part
of the whole puzzle you don't want to
overpay for your diagonal spread you
don't want to pay more than 75% the
width of the spread so on our $4 wide
diagonal in apple that would be about $3
on our $5 wide diagonal in spy that
would be about
$3.75 why is it so important that you
not overpay for your diagonal spread
well you need to remember that the width
of the spread less the debit that you've
paid that's your profit potential so on
that $4 wide diagonal in apple you pay
three bucks the maximum profit on that
strategy is $1 if you overpay if you pay
too much for your diagonal spread you
might find yourself having gotten the
move that you wanted and you didn't even
make any money you're not even
profitable and you're just left
scratching your head so by all means
Tinker with the strikes play around with
it a little bit until you get the risk
return trade-off that you want but if it
doesn't set up then it doesn't set up
just walk away and find something else
all right so that's how a diagonal
spread sets up now the fun part the
winning trades how do we manage these
guys well it's actually pretty simple
and it's very similar to everything
we've done to this point we set our
profit Target right at about 50% of Max
profit so again on that $4 wide diagonal
spread you pay three bucks your maximum
profit is $1 you're only looking to Come
Away with 50% of that so about 50 cents
that would be a winning trade you book
it you close it you move on you find
another opportunity all right so now
unfortunately not so fun stuff those
losing trades right you put on a call
diagonal and the stock goes down you put
on a put diagonal and the stock goes up
what do you do well this is the true
beauty of the diagonal spread because
remember you have distance between your
short option and your long option you
have options pun intended all right so
you've basically got three options here
number one you could roll that short
option forward into like a weekly cycle
and create for yourself sort of a mini
diagonal spread you'll be able to do
this for a credit this is probably the
most standard adjustment to a diagonal
spread number two you could roll forward
into a mini diagonal spread but
simultaneously you roll your short
strike in thus shrinking the width of
the diagonal spread if you choose to do
this you will aggressively collect more
credits but you need to be mindful that
you don't shrink the width so far that
the net debit that you've paid exceeds
the width of the diagonal SP because if
you do that you will be locking in a
loss number three you could also roll
the short option all the way into the
back month with the long option and this
would create for yourself a vertical
spread in that back month cycle okay so
when do you make these adjustments if
you don't get the move that you wanted
well this is largely going to be up to
your discretion but usually no sooner
than 21 days to go and possibly even
later in the cycle because this is a
defined risk strategy where your maximum
loss is approximately the cost that
you've paid for the diagonal spread all
right so those are winners those are
losers what about everything in between
what about when you get to 21 days to go
and you're kind of even what about when
you get close to expiration on that
short option and you're kind of at a
scratch what do you do well this is very
very simple roll that short option
forward into a weekly cycle and go for
that mini diagonal man unless your
directional bias has changed take full
advantage of the flexibility that you
have with this strategy all right guys
that's it we made it to the end that is
the diagonal spread in 8 minutes or less
I will see you in the next video which
is going to be our first undefined risk
strategy with short
strangle
we are going to dive into the undefined
risk category and we're going to do so
head first with the short strangle we're
going to follow the same protocols as
what we've done with all the other
videos up to this point we're going to
talk about managing winners we're talk
about managing losers and we're going to
talk about everything in between so
let's do it and let's begin with the
structure of a short
strangle so these short strangle is one
of the simplest undefined risk
strategies that you could select it
consists of two legs an out of- the-
money short call above the current stock
price and an out of- the money short put
below the current stock price that's it
now on Entry there are a few things that
you want to look out for number one
since this is a short premium strategy
it is best suited for a high ivr
environment now ideally this would mean
an ivr that's greater than 50 but at
times an ivr that's maybe 25 or 30 might
be high enough there is definitely some
flexibility here number two and
specifically two strangles we want to
make sure that we collect enough on
Entry we typically set our minimum bound
around $1 across both the put and the
call and the reason why is very simple
this is an undefined risk strategy so we
want to make sure that we are fairly
compensated for taking all of that risk
number three also specific to a Strang
a great starting point for your strike
selection would be somewhere around the
16 Delta Mark a 16 Delta short call a 16
Delta short put this is a classic one
standard deviation strangle use this as
a reference point to determine where you
want to select your strikes you may want
to collect more premium you may want to
increase or decrease your probabilities
that's perfectly fine but starting with
the one standard deviation strangle is a
really great
Foundation all right so now we know how
these guys set up let's get to the fun
stuff managing those winners this is
going to be pretty simple this is going
to be the same procedure that we have
followed with our other short premium
strategies short verticals and iron
Condors we take these guys off at 50% of
Max profit so for example if you sell a
strangle for $2 you're looking to buy it
back for $1 you sell a strangle for $150
you're looking to buy it back for $7 5
it really is that simple the one thing
that you want to make sure that you do
here though is don't take the legs off
separately don't lag out of the trade
our research has shown there's no
long-term benefit to doing this so keep
it very simple on as a package off as a
package all right what about these not
so fun guys what about these losers well
I hope you have your power aate zero
handy because you're going to need those
electrolytes this is going to be a lot
first up if the stock is between your
short strikes don't do anything if the
stock is between your short strikes even
if it's moving around a lot the strategy
is working let it work it isn't until
one of the short strikes gets hit that
the adjustment protocol to follow is
triggered all right so what happens when
the stock rallies and your short call
gets hit the stock Falls and your short
put gets hit it's basically a three-step
process with a four
bonus step that you can execute at your
discretion so let's get into it all
right step one you roll the untested
side into a tighter strangle where your
objective is to reduce the magnitude of
your Deltas by 30 to 50% so for example
let's say you put on that one standard
deviation strangle to begin with so
you're pretty delta neutral on trade
entry let's say the stock rallies up to
your short strike or maybe through your
short strike now your position Deltas
might be around minus 50 Deltas what you
would want to do is roll that short
putut up until you have trimmed the
magnitude of those bearish Deltas by 30
to 50% so if you're at minus 50 maybe
you're looking to reduce your Deltas to
minus 25 or minus 35 somewhere around
that 30 to 50% magnitud inal reduction
the same would be true if the stock fell
you would roll your call strike down to
again reduce the magnitude of your
bullish Deltas in this case by 30 to 50%
all right so what if the stock still
continues to move against you this is
where you go to step two you roll that
on tested side into a straddle now so if
the stock is continuing to Rally you're
going to roll that short put strike all
the way up until it shares the same
strike as your short call strike if the
stock is falling then you would roll the
short call strike down all the way to
share the same strike as the short put
strike all right but what if that's
still not enough what if the stock
continues to get away from you the stock
continues to move against you you go to
step three you're going to want to go
inverted with your strangle this means
you roll your put strike up above your
call strike if the stock is rallying or
you roll your call strike down below
your put strike if the stock is falling
doing this will really help to control
and mitigate your directional exposure
on the position now naturally if I was
in your position right now the number
one question that I would have is all
right Jim how do I know where to set my
inverted strike well to be honest there
is a lot of discretion that you're going
to need to apply there's plenty of pros
and cons plenty of gimmies and gotas
that you need to consider but here's a
great reference point consider moving
your inverted strike to the new at the
money strike the reason why this is a
great reference point a great anchor in
the sea if you will is the at the money
strike always has the greatest amount of
extrinsic value so if you move to that
strike you can be assured that you are
maximizing the extrinsic value that you
are collecting on the trade what you
really want to be aware of here is the
width of the inversion relative to the
credits that you have collected because
your best case scenario now is the stock
stays between your two short strikes and
the two options are in the money so you
can buy back that strangle for the width
of the inversion so for example if you
have a $5 wide inverted strangle and
you've collected $7 if the stock were to
expire inside of those two short strikes
both options would be in the money the
total intrinsic value would be the width
of the inversion for $5 you collected $7
so you would end up netting a positive
$2 profit on the trade so you always
want to be aware of this relationship
because things are a little bit
different now from what they were with a
regular strangle all right now that
fourth step that I promised you the
bonus step you can always roll out in
time you can always add duration to the
trade and you can do this whenever you
see fit you can combine it with step one
you can combine it with step two you can
combine it with step three so how do you
know when is the best time to pull the
trigger on this bonus step well remember
we typically like to keep our short
premium trades around 45 days to go so
if they're still around 45 days to go in
the current cycle like 47 or 43 or 40 or
39 then I would consider sitting tight
but if you've gotten to a point where
there aren't close to 45 days to go
maybe you're at 21 maybe you're at 25
maybe you're at 30 this might be a
really good time to roll this this
position out add that duration and use
this bonus step now a quick disclaimer
that entire protocol is a great guide to
follow and the reasons why are these all
along the way at every step in the
process you are collecting credits you
are reducing risk you are widening your
break even points but is this the only
way that you could adjust a short
strangle absolutely not are there other
viable successful ways to adjust a short
strangle absolutely but if you are brand
new if you are just gaining experience
and you are just getting your feet wet
then start here as you get some more
exposure to the markets as you gain that
experience by all means man tweak it
Tinker it and make it your
own all right lastly what about that
dance floor what about those trades that
aren't really winners they're not really
losers they're just kind of hanging out
somewhere in the middle well this is
pretty simple and it's going to be very
similar to what we've done with our
other short premium trades the short
vertical the iron Condor look at ivr if
ivr is still high if it's still elevated
then consider keeping it on but if ivr
has come down if ivr has collapsed then
consider taking it off all right guys
man you made it that was a lot when you
are ready I will see you in the next
video the short
put we are going to cover the short put
which is actually a bit of a downtick in
difficulty from the short strangle that
we just did in the last video so that's
pretty good we're going to follow the
same protocol that we've been doing
winners losers and dance floor so let's
begin with how a short putut sets
up all right so structurally
strategically a short put is actually
pretty straightforward first it's only a
single leg so that's pretty nice but
second we are almost always going to
choose an outof the- money strike on
trade entry for a new position and the
reason why is very simple by choosing an
out-of- the- money strike we leave
ourselves room to be wrong directionally
and still make money that alone is an
extremely powerful phenomenon for
example let's say you've got Starbucks
at $100 a share you want to sell a 95
put here is how a short put would set up
if Starbucks goes higher you're going to
make money if Starbucks goes nowhere
you're going to make money but even if
Starbucks goes down a little bit but
stays above that 95 strike you are still
on the path to making money in a market
that is very unpredictable and totally
random in the 45-day time Horizon this
is very very
advantageous all right so that's how a
short putut sets up now what about these
winners this is pretty straightforward
because it's going to be the same as
what we've seen with everything up to
this point with vertical spreads and
iron condors and diagonals and short
strangles we want to Target 50% of Max
profit so you sell the short put for two
bucks you're looking to buy it back for
a dollar you sell a short strangle a
short put for $180 you're looking to buy
it back for 90 it's really that simple
that's all there is to it okay so now on
to these losers the not so fun guys this
is where things can get a little bumpy
so you might want to buckle up and of
course this is not the only way that you
could handle these situations but I do
think it makes a little bit of sense
first up as long as the stock is above
your short strike as long as the stock
is above your short put doing nothing is
almost always the move to make it
doesn't matter how you feel it doesn't
matter what you think doing nothing is
the move okay but let's say now the
stock has fallen down to your short
strike now what do you do well it really
depends on the severity of the move
right like if the stock is now just
below your short strike then you
probably only need to roll out in time
right push this thing out to the next
cycle add some ation pick up some extra
insic value widen out those Break Even
points and you're probably going to be
okay okay but what if the stock has
fallen kind of significantly below your
short strike now what do you do well
first off as an initial line of defense
you probably want to go ahead and roll
out in time but also as a secondary line
of defense you might want to consider
adding a short call at the same strike
as your short put this would create for
yourself of course a short straddle and
it's going to effectively serve the same
purpose as rolling out in time you're
going to pick up more extrinsic value
you're going to help to widen out those
Break Even points but there's another
benefit adding those bearish Deltas from
the short call they will help to flatten
out your directional risk flatten out
your directional exposure from the deep
in the money or somewhat in the money
short putut that you have and those
bullish Deltas this will allow you to
focus more on non-directional elements
like Theta like Vega and less on Delta
okay but what if what if the stock has
fallen way below your short P strike now
again first off roll out in time add
that duration pick up the extrinsic
value widen out those Break Even points
but also adding a short call you
probably don't want to go to the stradle
strike now you might want to be a little
bit more aggressive you might want to go
right into an inverted strangle so your
short call strike will be below your
short put strike this will help to more
aggressively neutralize those deltas
while still bringing in credits adding
extrinsic value and widening out those
Break Even points the thing you want to
be aware of here and you want to be
careful of as we saw in the short
strangle video is you just want to make
sure that the width of your inversion is
less than the total credits that you've
collected so you're not locking in a
loss for this cycle okay so now that
you've made these adjustments how do you
know when it's time to get out how do
you know when it's time to exit a short
put or any undefined risk strategy for
that matter we here are some good rules
of thumb if your position was a loser
which is almost always going to be the
case in this scenario if you can work
that thing back to a scratch if you can
work that thing back to even then I
would strongly consider taking it off
turning a loser into a scratch is
basically like a winner at the end of
the day but what if this thing never
comes back what if the stock never
cooperates the position never
accommodates you and this thing just
becomes a runaway train somewhere around
2X to 3x of total credits received is a
good place to consider exiting your
trade if you don't want to hold it
anymore so just to be clear as an
example let's say you sell a put for $2
and then you make a couple of
adjustments you add some time and your
total credits collected become $5 if you
close that trade if it never comes back
and you close it for $15 that is a 2X
loser you collected $5 and you lost $10
that's a 2X loser if you were to close
it for $20 that would be a $15 loser or
a 3X loser all right so those are the
winners and those are the losers but
what about the Dance Floor what about
those in between guys when it comes to a
short put well as is the case with all
undefined risk strategies we don't want
to carry these inside of 21 days to go
so if you still have this on at 21 days
to go the choice becomes simple you
either roll it or you close it if ivr is
elevated and you still like your bullish
bias then consider rolling it if ivr has
fallen and you don't like your bullish
bias then consider closing it well what
if ivr has fallen and you still like
your bullish bias well that's your call
all right guys you made it that is the
end of the short putut video be sure to
save this video for a future reference
and when you are ready I will see you in
the next video short
straddles we are going to continue with
our undefined risk category today and we
are going to specifically cover
the short straddle now as you're going
to see this is going to be a little
different from what we've covered thus
far inside of the undefined risk
category so pay close attention we're
going to do this the same way that we've
done it to this point winners losers and
then dance floor so let's begin with how
a short straddle sets
up okay so a short straddle actually
sets up very similarly lead to a short
strangle you have two options you have a
short put and you have a short call the
key difference here though is that with
a short strangle we saw that there was
some distance between the short put and
the short call but with a short straddle
they're actually going to share the same
short strike and that short strike is
usually going to be situated right
around where the stock price is to
create that nutral directional bias so
for example if the stock price was 100
you would do a short put at 100 and a
short call at 100 if the stock price was
45 you would do a short put at 45 and a
short call at 45 now to be fair
naturally if I heard that if I was on
your end of the information today my
question would be Jim why in the world
would I do that why in the world would
anybody not have any distance between
their short strikes well the answer or
at least part of the answer is this
remember that the at the money strikes
always carry the greatest amount amount
of exic value so by choosing to sell
your strikes there you are maximizing
the short premium that you collect okay
so that's how a stradle sets up now on
to the fun part those winners how do you
handle those stratal that are profitable
well this is actually going to be
different from what we've seen in the
previous six videos we're going to
Target a smaller percentage of Max
profit we're only going to Target 25% of
Max profit and the reason why is this
yes it's true that the at the money
strikes command the greatest extrinsic
value but they also cling on to that
exic value the longest so we combat this
by more aggressively managing our
winners at a smaller percentage of Max
profit 25% relative to 50% like we've
seen with the other strategies so for
example if you sell a straddle for $5 we
would be looking to take off about a
do25 or 25% of that if you sell a strat
for $3 we will be looking to manage that
winner at about
75 all right so now on to the not so fun
stuff how do we handle those losers well
similar to a strangle this is going to
be kind of a stepbystep process as long
as the stock is between your break even
points you sit and you do nothing since
we have that shared strike one of our
strikes is always going to be in the
money so we can't use the distance
between the short strikes as our
reference point in instead we use the
break even points as long as the stock
is between those two markers the
strategy is working and your best bet is
most likely to do nothing so for example
if you sell the 50 straddle for $5 let's
say your upside Break Even is 55 your
downside Break Even is 45 those become
your two markers for knowing when it's
time to adjust your strategy okay but
now let's say one of your break evens
does get hit whether it be on the top
side or the bottom side what do you do
well first quick little disclaimer this
is of course not the only way that you
can handle a short straddle and its
adjustments but I do think it's a pretty
good foundation similar to what we saw
with a strangle this is going to be a
stepbystep process the key difference
here though is we don't have as many
adjustments available to us that we had
with the strangle because we're already
starting in the straddle position since
we're already in a straddle position we
basically only have two adjustments
available to us we either roll out or we
go inverted so how do you know which of
the two to choose well take a look at
how much time is left in your cycle
again if you are close to around 45 days
to go the move might be to go ahead and
go inverted follow the same protocols
that we've laid out in the previous two
videos with short puts and short
strangles start with that at the money
strike start with that at the money
strike because it has the greatest
amount of extrinsic value and then make
adjustments from there the one thing
that you want to be aware of of course
is the credits you've collected relative
to that width of inversion now if you
happen to be closer to 21 days to go
then roll out in time first go to that
next cycle add duration and pick up that
extrinsic and of course don't forget if
at any point in time you want to more
aggressively reduce your risk and more
aggressively improve your basis then you
can do both you can go inverted and roll
out in time at the same time okay now as
far as when to call it quits when to
wave that white flag well as we've seen
in the last couple of videos if you want
to manage your losers somewhere around
2x to 3x of total credits received is a
great starting point so for example if
you've collected $7 in total on your
straddle and all of its adjustments then
buying it back for $21 would be a 2X
loser buying it back for $28 would be a
3X loser if however you collected did
let's say $9 on your straddle and all of
its adjustments then buying it back for
$27 would be a 2X loser and buying it
back for $36 would be a 3X loser all
right so those are the winners and those
are the losers but what about everything
in between what about that dance floor
well this one's pretty simple because
it's the exact same as what we've seen
so far look at ivr if ivr is still
elevated then consider keeping it on if
ivr has collapsed then consider taking
it off all right so that's it the short
stradle is now in the books I will see
you in the next and final video the
ratio
spread we are going to cover the ratio
spreader we're going to follow the same
protocols that we follow to this point
we're going to cover winners we're going
to cover losers we're going to cover
that dance floor but first let's talk
about how a ratio spread sets
up so so the ratio spread this is
arguably the most versatile most
flexible strategy that is available to
us and it consists of two parts you have
one long option and you have two short
options the long option is usually
situated at the money or slightly out of
the money the two short options are then
placed further out of the money and
because you have two short options
relative to every one long option this
is going to be a net credit strategy so
for example let's say that the stock was
at $50 you might set up a put ratio
spread using the 49 strike and the 48
strike you would buy a put at the 49
strike and then sell two puts at the 48
strike but let's say the stock was
$75 you might set up a put ratio spread
using the 75 and 72 a half strikes you
would buy a put at the 75 strike the at
the money strike and then you would sell
two puts at the 72 and a half strike
strike the outof the money strikes now
there are a few things that you want to
be aware of that you want to be
cognizant of when it comes to putting on
a ratio spread first The Wider you go
with your ratio spread the greater your
maximum potential profit this is because
the vertical spread that's kind of baked
into the center of the ratio spread
could potentially be worth more money
the trade-off here is the wider you go
with that ratio spread the lower your
credits collected second you want to
make sure that on you collect a credit
that is economically significant you'll
see why in a couple of minutes third we
typically prefer put racial spreads over
call racial spreads and this is for the
same reason that we typically prefer
short puts over short calls the market
wants to go higher over time so battling
a short call over cycle after cycle
after cycle in a market that wants to
grind higher can really be a stick in
the mud all right so managing winners
everybody's favorite this is actually
going to be a little bit more involved
than what we've seen to this point and
that's because with a put ratio spread
you can actually make money in both
directions if the stock rallies then
you're going to keep the credit
collected because those options are
going to move further out of the money
but if the stock Falls then you could
potentially make more money this would
happen at expiration if you pin that
short strike you'll keep that credit
collected but you'll also pick up the
width of the ratio spread since we don't
hold our undefined risk trades inside of
21 days to go we're actually not super
interested in that stock falling
scenario since that's never really going
to come into play so we want to focus
our energies on the stock rallying
scenario how do we manage those winners
because racial spreads are so versatile
and they are so flexible you're going to
have to use a lot of discretion in
handling these situations but if the
stock does rally and the options move
further and further out of the money
you're going to want to look to capture
most of the credit that you have
collected so for example let's say you
put a ratio spread on on entry for 60 if
you can buy that thing back for 20 cents
a week later then you might want to
consider doing that let's say you put a
ratio spread on for 90 cents if at some
point in the future you can buy that
thing back for 30 cents or 33 cents you
might want to consider that one too
again there's no hard cut off point here
so you're going to have to use your
experience as your guide but do you
remember when we said it needs to be
economic Ally significant this is why
you want to put yourself in a position
to where if the stock does rally and
your p&l approaches that credit
collected that it is Meaningful all
right so now what about those losers
well our reference point for adjusting
is going to be that short strike as long
as the stock is above your short strike
then you do nothing all right easy
enough but now what do you do if the
stock does fall down through your short
putut strike how do you handle that
situation well the first thing you're
going to want to do is check the value
of the vertical spread that is baked
into the center of the strategy if you
can take that off for nearly max value
then go ahead and take that off so for
example if you have a $1 wide ratio
spread then the vertical spread that's
in the center is $1 wide if you can take
that off for 85 cents that's almost max
value if you have a $2.50 wide ratio and
you can take off the vertical spread for
$2 that's also almost max value now
where is the cutof off point for
determining if it's enough on the
vertical spread to take it off well
that's largely going to be up to you but
I can tell you what I do if I can't get
at least 80% of the vertical spreads
value then I do not take it off if you
are able to close out of that long putut
vertical for near max value now all you
have left is a short put so manage it in
the same way that we did in the short
putut video just keep in mind that now
your total credits collected are the
credits on order entry and the credits
from selling out that vertical spread
okay but what do you do if you can't
close out of that vertical spread for
near max value well you basically have
two options First Option you sit and you
wait you do nothing you can do this here
because either one of two things is
going to happen a the stock goes down if
the stock goes down then that vertical
spread is going to increase in value and
you're going to be able to close it down
you close it down you manage that extra
short putut accordingly and you move on
or B the stock actually rallies if the
stock rallies then those options could
be out of the money again this is an
even better scenario but the second
option of course is you can roll the
whole thing out in time you can pick the
whole thing up the short putut the
vertical spread all the pieces and roll
it out in time if you do this you will
reduce your risk and add duration to the
trade all right easy enough but what do
you do if the stock just keeps falling
what do you do if no matter what you do
the stock will not come back well again
remember if you choose to manage your
losers somewhere around 2x to 3x of
total credits received is a really good
marker so for example if your total
credits from order entry from rolling
out from closing out that vertical
spread if all of these credits were $4
for example and buying it back for $12
would be a 2X loser and buying it back
for $16 would be a 3X loser all right so
those are the winners and those are the
losers but what about everything in
between what about that dance floor well
since you have that extra short put and
this strategy is so flexible rolling out
in time as your default option is not a
bad move but remember you can always use
ivr as your guide if ivr is still
elevated then keep it on if ivr has
fallen then take it off wow you guys
made it the option crash course strategy
Series has now come to a close I
sincerely hope that you guys got some
value from these videos so that is it
and I will see you guys next
time
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