THE PERFECT OPTIONS STRUCTURE TO USE IN TOP REGIONS (AND WIN ON THE DECLINE)

Summary

In this video, Stephanie Mandoles introduces a powerful options strategy called the 'Fence,' ideal for market corrections. She explains how to use this structure to hedge against losses when stocks are at their peak and are likely to correct. By selling calls and using the proceeds to set up bear call spreads, investors can protect themselves with minimal risk. The strategy benefits from high-interest rates, which increase the value of options. Stephanie demonstrates this strategy in action, showing how it can result in significant profits even with a slight market dip. She emphasizes its flexibility and intelligent leverage.

Takeaways

• 😀 The structure discussed is ideal for use in top regions where a market correction is expected, making it a great strategy for corrections.
• 😀 The Fence strategy involves selling an out-of-the-money (OTM) call and using the money to set up a bear spread with controlled risk.
• 😀 If you already own the asset, the Fence strategy acts as partial protection, helping to offset losses in case the asset drops.
• 😀 If you don't own the asset, the strategy can be used to profit from a market drop with leveraged exposure while keeping risk controlled.
• 😀 The current market environment with higher interest rates results in more expensive calls with higher extrinsic value, making the strategy more profitable.
• 😀 The adaptation of the Fence strategy involves selling an at-the-money (ATM) call to receive a higher premium and using it to fund multiple bear spreads.
• 😀 The strategy enables you to set up many bear spreads (e.g., 12) with a single sold call, maximizing profit potential with minimal risk.
• 😀 The example given shows how a small correction in the asset’s price can lead to substantial profits, with potential returns of R$ 12,000 using this strategy.
• 😀 A practical example is given where the position began to show a profit within three days, demonstrating the speed at which the strategy can become profitable.
• 😀 The Fence strategy allows for flexibility in managing risk and adjusting the position over time, offering opportunities for partial exits or rolling options depending on market movement.

Q & A

What is the purpose of the strategy discussed in the video?

The strategy discussed is a type of options trading called a 'Fence' strategy, designed to protect against potential market corrections while leveraging the benefits of option selling and buying. It's particularly effective in market tops when a correction is anticipated.

What does the 'Fence' strategy involve in terms of options?

The 'Fence' strategy involves selling an out-of-the-money (OTM) call and using the money received to create a bearish spread or 'put ladder'. The key risk is tied to the sold call, and the strategy can be used either with or without owning the underlying asset.

How does the strategy help if the investor already owns the underlying asset?

If the investor already owns the asset, the strategy acts as a partial hedge. The call selling helps offset losses in the asset if its price drops, essentially providing a form of insurance against a market correction.

What happens if the investor does not own the underlying asset?

If the investor does not own the asset, the strategy becomes a directional trade that profits from a price decline. The strategy uses a call option to generate premium income and purchases puts to create a leveraged position with controlled risk.

What role does the interest rate play in the 'Fence' strategy?

Interest rates affect the pricing of options, particularly call options. Higher interest rates make call options more expensive, thus allowing the investor to sell calls with higher premiums and build larger bearish spreads (put ladders) for more significant leverage.

Why is selling an at-the-money (ATM) call particularly beneficial in this strategy?

Selling an ATM call is beneficial because it holds significant extrinsic value, meaning the premium received from selling it is larger. This larger premium allows the investor to build more bearish spreads with the same amount of risk, increasing the potential return.

How many bearish positions can be created from a single sold call?

From a single sold call, multiple bearish positions (or put ladders) can be created. In the example given, 12,000 bearish positions can be funded from the premium received from the sale of just 1,000 calls, providing substantial leverage.

What is the key risk associated with this strategy?

The key risk lies in the sold call. If the underlying asset's price rises significantly, the investor could face losses on the sold call. The risk is either mitigated by owning the underlying asset or by taking steps to manage the sold call, such as rolling it.

How quickly can the 'Fence' strategy start generating profit?

The strategy can begin to show a profit relatively quickly. In the example, after three days of market movement, the strategy entered the profit zone with a return of nearly 10% based on the margin required for the trade.

What are some ways to manage the risk of the 'Fence' strategy as market conditions change?

As market conditions change, the investor can manage risk by reducing the number of calls sold, rolling the call position to adjust for new market dynamics, or by taking partial profits (selling a portion of the position). These steps help reduce exposure while maintaining a profitable position.