If I Could Only Trade ONE Strategy, It Would Be This (Options Retirement Strategy For Beginners)

Summary

The video script introduces the 'Put Ratio Spread Retirement Strategy' for investors seeking a consistent trading method for retirement. It explains how combining a short put option for a credit with a long put spread can create a neutral to bullish position, offering protection against market downturns. The script details profit scenarios, risk management, and tips for selecting stocks and strike prices, emphasizing choosing fundamentally sound, undervalued stocks and waiting for oversold market conditions for optimal trade entry.

Takeaways

• 📈 The video introduces a retirement investment strategy called the 'Put Ratio Spread', which is a combination of a short put option and a long put spread.
• 💡 The short put option generates a credit, which is then used to finance the purchase of the long put spread, creating a net credit for the investor.
• 🔄 The strategy is designed to be repeated, offering a single, consistent strategy for investors who prefer not to trade many different types of options strategies.
• 🛡 The long put spread serves as a defensive measure, protecting against market downturns by allowing the investor to profit from the bearish component of the strategy.
• 🤔 The video emphasizes the importance of choosing stocks that are fundamentally sound and that you would not mind owning long-term, reducing the risk of the strategy.
• 📉 The risk of the strategy is highlighted as the potential loss if the market continues to decline, causing the investor to lose on their shares.
• 📊 The video discusses various methods to reduce risk, including keeping a watch list of fundamentally good stocks, identifying undervalued stocks, waiting for a good setup, and identifying support levels.
• 𦓔 The selection of the DTE (Days to Expiration) for the options is flexible, with longer DTEs offering better entry prices for potential share assignments but lower ROI.
• 🎯 Strike selection for the short put is crucial, with Delta used to gauge the likelihood of assignment, and the choice between price selection or Delta selection based on investor preference.
• 📌 The long put strike selection depends on the investor's market outlook, with a more bullish outlook leading to a further out-of-the-money strike for a higher credit, and a more bearish outlook opting for a nearer strike for a higher max profit.
• 📚 The presenter offers a free 'Options Income Blueprint' for viewers interested in learning more about consistent income-generating options strategies.

Q & A

What is the put ratio spread retirement strategy discussed in the video?

The put ratio spread retirement strategy is an options trading strategy that combines a short put option, which generates a premium, and a long put spread, which is purchased using the premium received. It's designed to be a repeatable strategy suitable for those looking for a single approach to trade for retirement purposes.

How does the short put option in the put ratio spread strategy work?

In the put ratio spread strategy, selling a short put option involves receiving a premium for it. This premium is then used to finance the purchase of the long put spread, creating a net credit for the trader.

What is the purpose of adding a long put spread to the short put option?

The long put spread is added as a defensive measure. It allows traders to profit if the market goes down, thus balancing the risk of the short put option, which is more profitable if the market goes up or stays stable.

Why might someone choose the put ratio spread strategy for retirement?

The put ratio spread strategy can be chosen for retirement because it offers a balance between potential profit and risk management. It allows for consistent income generation with the potential for profit in various market conditions, making it suitable for long-term financial planning.

What are the different scenarios in which the put ratio spread strategy can be profitable?

The strategy can be profitable in scenarios such as when the stock expires above the put ratio spread, when the stock goes below the long put but stays above the short puts, and when the stock goes below the put ratio spread, requiring careful management of the components.

How can one minimize risk when using the put ratio spread strategy?

Risk can be minimized by choosing fundamentally sound stocks or index ETFs, identifying undervalued stocks, waiting for a good setup like an oversold market condition, and identifying support levels where the price has difficulty falling below.

What is the significance of choosing the right Delta for the short put option in the put ratio spread strategy?

Choosing the right Delta helps determine the likelihood of the short put option being in the money at expiration. A lower Delta indicates a lower chance of assignment, which can be preferable depending on the trader's outlook and risk tolerance.

How does the Days to Expiration (DTE) affect the put ratio spread strategy?

A shorter DTE can offer a higher return on investment due to a higher premium received, but it may also result in a less favorable entry price for long shares. A longer DTE may reduce ROI but can provide a better entry price and more time for the market to move in the trader's favor.

What is the trade-off when selecting a long put strike that is closer to the current market price?

Selecting a long put strike closer to the current market price provides a more defensive structure and a higher maximum profit potential if the market goes down. However, it results in a lower credit for the put ratio spread and a lower overall profit if the market goes up.

What is the role of the stochastic oscillator in the put ratio spread strategy?

The stochastic oscillator is used to identify overbought or oversold market conditions. It serves as a defensive measure to help traders determine a good setup for entering the put ratio spread, with oversold conditions being more favorable for a bullish outlook on the strategy.

Why is it important to identify support levels when using the put ratio spread strategy?

Identifying support levels is important because these are price points where the market has historically had difficulty falling below. Trading the put ratio spread near these levels can increase the probability of the strategy expiring worthless, thus maximizing the credit received.

Outlines

00:00

📈 Introduction to the Put Ratio Spread Retirement Strategy

The speaker introduces a retirement-focused options strategy called the put ratio spread. This strategy is recommended for those who prefer a single, repeatable trading method. It combines a short put option, which generates a premium, with a long put spread, which is bought using the premium received. The put ratio spread is explained as a mix of bullish and bearish strategies, offering a defensive measure against market downturns while benefiting from the premium received for selling the short put option.

05:01

🤑 Profit Scenarios of the Put Ratio Spread

The video script outlines various scenarios where the put ratio spread can yield profits. If the stock price remains above the put ratio spread at expiration, the full credit received from the strategy is kept. If the stock dips below the long put but stays above the short puts, the put debit spread can generate profit. The third scenario involves the stock falling below the put ratio spread, where the strategy can still be profitable, and the trader has the option to roll or let the short puts expire, potentially leading to a long stock position.

10:03

🛡️ Managing Risks in the Put Ratio Spread Strategy

The speaker discusses the importance of risk management when using the put ratio spread strategy. They suggest keeping a watch list of fundamentally sound stocks that one would not mind owning if assigned. Additionally, identifying undervalued stocks can provide an extra layer of security. The speaker also emphasizes the significance of the stochastic oscillator and support levels in determining good entry points for the strategy to minimize risk.

15:04

📉 Dealing with Market Downturns in the Put Ratio Spread

This paragraph delves into the actions to take if the market continues to decline, causing losses on the shares obtained from the short put option. The speaker advises on how to reduce risk by selecting stocks that one is comfortable holding long-term and ensuring they are fundamentally strong and undervalued. The importance of waiting for an oversold market condition and identifying support levels is also highlighted to enhance the probability of a market recovery.

20:06

🎯 Trade Construction for the Put Ratio Spread

The speaker provides guidance on constructing the put ratio spread trade, focusing on the selection of the right Delta for the short put option and the appropriate strike price for both the short and long put options. The choice of Delta indicates the likelihood of assignment, while the strike price selection depends on the trader's outlook on the market. The trade-off between higher returns with shorter Delta times and the potential for better entry prices with longer Delta times is explained.

25:06

🚀 Conclusion and Next Steps for the Put Ratio Spread Strategy

The final paragraph wraps up the discussion on the put ratio spread strategy, encouraging viewers to apply it and share their thoughts. The speaker also promotes a follow-up video and offers a free copy of the 'Options Income Blueprint' for viewers interested in learning more about consistent income-generating options strategies. The emphasis is on understanding the strategy's mechanics and making informed decisions based on individual risk tolerance and market outlook.

Keywords

💡Put Ratio Spread

The 'Put Ratio Spread' is an options trading strategy that combines a short put option and a long put spread. It is designed to be a versatile strategy suitable for those looking for a single approach to trade repeatedly, as mentioned in the video for retirement purposes. The strategy involves selling two out-of-the-money put options and buying one in-the-money put option, creating a credit which can be used to finance the purchase of the long put spread. It is highlighted in the script as a strategy that can be profitable in various market conditions and is central to the video's theme of a retirement strategy.

💡Short Put Option

A 'Short Put Option' is an options contract where the seller (or writer) has the obligation to sell the underlying asset at the strike price if the buyer chooses to exercise the option. In the context of the video, selling a short put option is the first part of the put ratio spread strategy, allowing the seller to receive a premium for taking on this obligation. It is used as a means to finance the purchase of the long put spread in the retirement strategy discussed.

💡Long Put Spread

A 'Long Put Spread', also known as a put debit spread, involves buying a put option while simultaneously selling another put option with the same expiration date but a different strike price, typically lower. In the video, it is part of the put ratio spread strategy, serving as a defensive measure to protect against market downturns and to profit from a decrease in the underlying asset's price.

💡Premium

In options trading, a 'Premium' is the price paid by the buyer to the seller for the option contract. The premium is a key component of the put ratio spread strategy as it is the income received from selling the short put option, which is then used to finance the purchase of the long put spread. The script explains how the premium received can lead to a net credit for the trader.

💡Defensive Measure

A 'Defensive Measure' in the context of trading strategies is a technique or tool used to mitigate potential losses. In the video, the long put spread within the put ratio spread is described as a defensive measure that protects the trader's position in case the market declines, allowing for the potential to profit from the bearish aspect of the strategy.

💡Market Direction

The 'Market Direction' refers to the anticipated movement of the price of an asset or index, either upward (bullish) or downward (bearish). The video discusses the importance of not relying solely on market direction predictions and instead using a combination of bullish and bearish strategies within the put ratio spread to manage risk and profit potential.

💡Profit Scenarios

The 'Profit Scenarios' outlined in the script are the various market conditions under which the put ratio spread strategy can yield a profit. These include the stock expiring above the short put strike price, the stock trading below the long put but above the short puts, and the stock trading below the put ratio spread. Each scenario is explained in the video with corresponding profit outcomes.

💡Risk Management

Risk management is a critical aspect of trading strategies, and the script discusses several risk management techniques for the put ratio spread strategy. This includes choosing fundamentally sound stocks, identifying undervalued stocks, waiting for oversold market conditions, and identifying support levels. These measures are designed to reduce potential losses and increase the likelihood of a profitable outcome.

💡Expiration

In options trading, 'Expiration' refers to the date on which an option contract becomes invalid if not exercised. The video script discusses how the outcome of the put ratio spread strategy is influenced by whether the underlying stock's price is above or below certain strike prices at expiration, affecting whether the options expire worthless or result in a profit.

💡Stochastic Oscillator

The 'Stochastic Oscillator' is a technical indicator used to analyze the momentum of an asset's price to determine overbought or oversold conditions. In the video, it is suggested as a tool to identify good entry points for the put ratio spread strategy, with the script noting that an oversold market condition provides a more favorable setup for the strategy.

💡Support Level

A 'Support Level' in technical analysis is a price level at which an asset's price tends to find stability and is unlikely to fall below. In the video, support levels are discussed as a defensive measure to identify good entry points for the put ratio spread strategy, as it provides a higher probability of a price rebound or reversal if the market tests this level.

Highlights

The put ratio spread retirement strategy is introduced as a single, repeatable trading strategy for retirement purposes.

The put ratio spread combines a short put option, which generates a premium, with a long put spread, which is financed by the received premium.

The strategy involves selling two short puts and buying one long put, sharing the same strike price for the short puts.

The risk of the two short puts is mitigated by the long put, which acts as a hedge if the market declines.

An example illustrates the construction of the put ratio spread, using a $3 credit to finance a $1 long put spread, resulting in a net credit of $2.

The put ratio spread serves as a defensive measure in market downturns, allowing for potential profit from the long put spread.

Profit scenarios are outlined, including expiration above the put ratio spread, between the long and short puts, and below the short puts.

If the stock price falls below the short puts, the strategy involves separating the components and managing them individually.

Two methods for managing a short put in a down market are presented: holding to expiration or rolling the put to a different strike price and expiration date.

The importance of selecting fundamentally sound stocks for the put ratio spread is emphasized to ensure long-term value.

Identifying undervalued stocks further reduces risk, providing conviction to hold shares if assigned.

Using technical indicators like the stochastic oscillator can help in timing the put ratio spread to avoid overbought conditions.

Support levels are important for determining a good entry point for the put ratio spread, increasing the likelihood of a price rebound.

The selection of the Days to Expiration (DTE) impacts the return on investment, with shorter DTEs offering higher returns but less favorable entry prices.

Delta can be used to select the short put strike, indicating the probability of assignment at expiration.

The long put strike selection depends on market outlook; a more bullish view would choose a further out of the money strike.

A more bearish or defensive approach would select a long put strike closer to the current market price for greater profit potential in a down market.

The put ratio spread retirement strategy is summarized, highlighting its flexibility and defensive nature in various market conditions.

Transcripts

all right alrighty so in today's video

we're going to be talking about one

option strategy that you can use for

retirement right so if you're the kind

of person that you know you don't like

to trade many different kind of

strategies you just want one strategy

that you can trade over and over again

and you were to ask me you know what

would I suggest then I would say it

would be this strategy so what is this

strategy well this strategy is what I

call the put ratio spread retirement

strategy right so we're going to use the

put r spread and train it in a way where

it will suit our retirement purposes so

first of all what exactly is the put

ratio spread so if you're not familiar

with the put ratio spread the way that I

like to see it is a combination of two

different strategies right two different

strategies both are simple on its own so

the very first strategy is what is

called the short putut right so with the

short putut when you sell the put option

you're going to receive a premium for it

right so this is the first part of it

you're going to receive a credit for

selling this put option now with this

credit that you receive what you're

going to do is that you're going to buy

a put spread right so this is what you

call a put debit spread or a long put

spread or you can also call it you know

the bare put spread so for this long put

spread what's going to happen is that

you're actually going to pay a premium

for that so the whole idea down here is

that you're using the premium which you

receive for the short putut to fin the

purchase of the long put spread right so

as you can see down here you will have

two short puts and one long put so when

you combine it together basically it

will look like this so the whole idea

down here is that the short putut part

of the long put spread as you can see

over here is actually sharing the same

strike price as the one sh put on the

left hand side right so if you combine

them together you will see that there

are two short puts at one strike and

then on top of it you have one long put

right so some people take a look at this

and they say hey there's two short puts

isn't it double the risk so it's not

double the risk because for one of them

you actually already have this long put

right so it's being covered by this long

put so how you want to see it again like

I mentioned you want to see it as a long

put spread and then one additional short

put at the side okay so this is the put

ratio spread so again the whole idea

down here is that you're using the short

putut to finance the purchase of the

long put spread so here's an example so

let's say you sell one short putut right

you sell the short putut and you receive

$3 in credit for it so for every short

putut that you sell that is $300 you're

going to receive in premium now with

this $3 credit that you receive you're

going to use a part of it to buy the put

debit spread right so as you can see

down here if you buy the long put spread

for a dollar then the overall spread the

put rtio spread when you combine them

together the total credit you're going

to receive is $2 right so that means

you're going to receive $200 per put

ratio spread so this is the whole gist

of the put ratio spread how you're going

to construct it now you might be asking

hey Davis why do I want to add the long

put spread right wouldn't it be much

more simpler if I just had you know just

the short putut and that is a good

question so there is a reason why we

want to use the long putut spread and

that is because we want to use it as a

defensive measure right because one of

the things that a lot of people are

afraid of whenever they you know do the

short putut is what if the market comes

down right if the market comes down this

is where they're going to panic right

because they got a short putut they

don't want the market to come down so

they you know are afraid right but with

the put ratio spread you have this long

put spread so it is like a defensive

measure so in case if the market

actually comes down we actually have

like a semi hatch in place right not a

full hedge of course a semi hch in a

sense whereby if the market comes down

you can actually still make some profit

from the put debit spread portion right

because the put debit spread is a

bearish strategy right so the short

putut is a semi bullish strategy right

depending on how far away your short

putut is but generally it is a neutral

to bullish strategy in the sense whereby

you want the market to go up to make

money whereas for the long put spread

it's very clearcut that you want the

market to go down in order for the long

put spread to make money so what you

have down here is a combination of a

bullish and a bearish strategy so

whenever we put on any strategy of

course if you put on a bullish strategy

we want the market to go up right but

how good are we in picking the direction

right if you're already so confident

thinking that the market is going to go

up then don't get into options right

just buy the stock outright the market

if it goes up you're going to make even

more than just selling the put option so

the reason we want to put the long put

spread in place is also because we're

not very sure if the market really will

go up right nobody can really predict

the market 100% I mean if you can then

of course you're a genius you should be

a millionaire by now or a

multi-billionaire by now you shouldn't

be watching this video right but for the

most part all of us Mortals the rest of

us we're not sure so we want to have

this long put spread as a defensive

measure the market comes down we can

still make some profit on that put debit

spread and at the same time if the

market goes up we will actually still be

in a profit right because remember we

receive a credit for this whole put

ratio spread so we're not that worried

and if the market comes down we actually

also look forward to it because we have

the long put spread in place now the

next question you might have is Davis

how do I make money with this strategy

so there are a few scenarios that we

actually can profit with this strategy

and I'm going to share it with you right

so the very first scenario is if the

stock actually expires above the put

ratio spread right so this is our

structure down here so anywhere above

this structure it will expire worthless

right basically because you know it did

not come down right if it did not come

down the profit which we're going to get

is pretty much the full credit that you

receive for putting on this strategy so

if you recall the example earlier I said

that you know you put up this put ratio

spread you receive a total credit of $2

right so for every put ratio spread you

will receive $200 so this is a very

straightforward scenario now scenario

number two what if the stock actually

goes below the long putut but it

actually stays above the short puts so

right now as you can see it actually

went in between our structure down here

so at this point of time what exactly do

we do so if you do actually have this

scenario it actually is good for you

right because you are actually going to

be in a profit as long as it stays

somewhere there close to expiration

right so once it's near expiration all

you got to do right is just close out

the whole spread right close out this

put ratio spread for a profit right so

as you can see down here this is the p&l

graph of the put ratio spread so as you

can see down here there are two puts

down here so this corresponds to this

one down here and then you have one long

put so this one long put is down here so

you can see down here this is where the

market price is right so this also you

know coincides with where the current

market price is down here so that means

to say if the market actually comes down

here and stays between the put options

right that means the two short puts and

the one long put you are actually going

to make more than if the market actually

went up right so you can see down here

if the market actually went up all

you're going to get is just the credit

which you Reed for putting on the

strategy but as the market actually

comes down you notice that the max

profit is actually near where the short

puts are right in fact the max profit is

right at where the short putut is so if

it actually stays between these two puts

down here then actually you will be in a

better profit right let me just draw a

line down here so somewhere down here or

let me just shade it this whole area

down here right as long it's below the

long put above the two short puts then

your profit is going to be greater than

what you would get if the market goes up

right basically you get more than the

credit so why is that so and the reason

is because remember I told you about the

long put spread when the long put spread

is in play When the market Comes Down

The Long put spread actually helps you

make money as well so that is why you

actually make more than if the market

was to go up and you just receed the

credit right so if you think about it

this way you're actually paying money

for the put debit spread so if the

market actually go goes above the put

debit spread so let me just remove all

this again so let's say if the market

stays above the put debit spread your

put debit spread actually lost money

because you actually paid for it right

so you actually do not get anything from

the put deit spread you lost whatever

you sort of you know used to finance

this put debit spread but if the market

comes down now your put debit spread

actually makes money so down here you

have a combination of two things you

have the credit which you receive UPF

front plus you get a profit for closing

out the debit spread which is in profit

all right so this is for scenario number

two now scenario number three what if

the stock actually goes below the put

ratio spread right so if you were to

just go back to this graph down here you

notice that even though if it goes below

the put ratio spread that means let's

say for example somewhere down here let

me just remove this drawing again and

I'll draw this so that means we just go

slightly below the two shuts if you

actually go slightly below the two short

puts you notice that at expiration we

actually still going to be in a profit

right at this point down here it's going

to be you know a pretty nice profit but

we actually do not want to hold it to

exploration why is that so well because

if you're going to trade this on

individual stocks right or even on index

ETFs these two shuts is going to get

assigned at expiration right so for

scenar number three if the stock goes

below the put ratio spread what we want

to do is that we're going to separate

this tra stry into the two components

which we talked about right the short

putut and then the long putut spread

because now we're going to manage them

separately so bear with me here just uh

really pay attention to this part

because it's quite important so the

first step you want to do once the

market actually goes below the whole put

ratio spread construct that means below

the short put this is where your put

debit spread will be in a profit now at

this point in time you can actually

close it out for a profit now that you

have already closed out the put that

spread you are left with just the short

putut so what do you do with the short

putut right so there are two methods

that you can do right now number one you

can leave it to expiration because

remember the whole idea down here is

that you actually do not mind getting

into the long stock position right the

way we want to trade put ratio spread is

a way whereby we don't mind getting into

the stock and then if we are in the

stock position the market goes up again

we're going to profit on the shares that

we got assigned on so method number one

you leave it to exploration

two things can happen the first thing is

that if the stock goes back up by

expiration that means it expires

actually worthless then you actually do

not have to worry about anything because

right now you made the full profit on

the short put side because the credit

whatever you receed you got it and then

you also sold the put debit spread you

got a profit there as well right so this

is a good scenario for you now the

second scenario after using method

number one is that if the stock stays

below the sh putut at expiration you

will get a sign right you get 100 shares

and this is actually what we want so

remember the whole idea of this put

ratio spread strategy is we actually

don't mind getting into a long stock

position right a very simple way is to

just get into the shares if the market

goes up and then you get a profit from

there as well now method number two is

that you can actually roll the shut

right so how do you roll the shut you

can roll the shut simply by roll pulling

out to a further DTE and to a lower

strike price so for example if there's

maybe let's say there's 15 DTE left in

this shut right and then you just roll

it so what you want to do is you want to

roll it to maybe a higher DTE so it

depends on what you can get right and

also how low of a strike price you want

to go to but basically when you're

rolling you can actually get an

additional credit and at a lower strike

price so maybe this time you want to

roll it to 30

DTE and then you want to roll the strike

price further down right so whatever the

price is so maybe if originally it was

$50 then you want to roll it down to

maybe $48 depending on what you can get

on the option chain so when you do this

you can actually get a credit at the

same time you leave more room for the

market to actually have a possibility to

go back up then this whole sh putut

again will expire worthless now what if

it goes down well if it goes down then

guess what you can go back to Method

number one again right method number one

that means you can either just leave

that to exploration see whether you get

assigned or if you can roll it again you

can choose to roll it even further down

and if you get assigned again this time

you will get a lower strike price right

you will buy the shares at a lower price

so this actually is a very good scenario

for us because if you actually get

assigned the shares and then the market

shoots back up you make on a lot of

wayte right you make on the put debit

spread you also receive the credit for

the shut and then for the shares you're

going to make profit if the market goes

up right so there'll be a capital gain

so at this point in time you might be

asking Davis this sounds all fine and

dandy right it sounds so good but where

is the risk in this strategy by the way

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all right back to the video well that's

a very good question because we must

always find out what is the risk in the

strategy and the risk is if the market

keeps going down right so for example in

scenario number three you get assigned

the shares the market keeps keeps going

down so if the market keeps going down

you're going to start to lose on your

shares all right so in this case what do

you do right how do you reduce the risk

okay so I'm going to share with you a

few ways that you can reduce the risk so

uh really take some notes if you can so

the very first thing you want to do is

to keep a watch list of stocks that you

actually don't mind owning right so

ideally you want to go for fundamentally

good stocks or index ETFs right so if

you go for stocks that you know in the

long term it's going to keep going up

you actually do not mind getting into

the long stock right so for some people

they like to you know buy more

speculative stocks for example I've had

people that say you know I like GameStop

right they're waiting for roaring Kitty

to maybe suddenly come up with a tweet

the stock shoots up right that's all up

to you right basically you want to keep

a watch list of stocks that you do not

mind owning so even though if you're

long the stock you're okay with that now

the next way that you can reduce the

risk is to actually identify the stocks

that are currently undervalue right so

you already have a watch list of the

stocks you don't mind owning and most of

them hopefully is fundamentally good

stocks then what you can do is that you

can go to some of the sites down here

right for example simply Wall Street or

Guru Focus or Morning Star so on so

forth right there are a number of the

sites where they actually you know tell

you what is the value of it whether is

it undervalue or overv value now each s

might have their own valuation so what

you want to do is that you just want to

go through you know all the size and

then just maybe get an aggregate of it

or just find the one that has you know

the the one that makes sense to you most

or whereby you know you find one where

the fair value is the lowest all right

so out of those stocks you want to find

the one that is undervalued because now

you have an additional defense mechanism

right because you may have actually

fundamentally good stocks that you want

to go long which you don't mind owning

the shares but if you get it at a price

where it's too expensive right if it's

above the fair value then it could take

quite some time before the market comes

back up again if it keeps going down

right and that is why you know if you

find it undervalue again then this would

be one other way that you can further

reduce risk whereby if you actually do

get long let's say for example you get

assigned on that short putut you now at

least have the conviction to hold on to

those shares because you can see that

it's undervalue right so for example as

an example we're just going to use this

price right for some people you know if

you find this too expensive go for the

cheaper stocks right so let's say for

example for this you can see that the

fair value down here and the current

price is quite a big difference right so

if you think that this fair value is

pretty accurate then even though you get

assigned at the current price you don't

have to worry right you can just hold on

to it right for example in 2022 where a

lot of the stocks right they went so far

down that you know a lot of people panic

they close up their stocks but if if you

already understood the stock that you

are buying the company and you think

that it's undervalued you can hold on to

it and then the market will eventually

come back up as it did right as you can

see in 2023 2024 the market just shot

back up that is why you know certain

stocks like Google meta Amazon if you

had entered them at a price where you

know it was undervalued then you

definitely would have the conviction

holding power to hold on to it until the

market eventually comes up now the third

one is to wait for a good setup right so

we already have quite a number of

defensive measures now this will be the

final defensive measure right so what is

a good setup so this is something that

I've talked about in quite a number of

videos so this is a very good way

especially if you're new to trading

options then this good setup you can use

is number one just put on the stochastic

oscillator right so the stochastic

oscillator basically just measures the

condition of the market right is it

overbought or is it oversold so as you

can see down here I've circled it in

rate already as long as it goes below

this line at the bottom it considered

overs so that means to say that the

market has already sold off quite a bit

and the chances of it you know going

back up at least would be slightly

better than if it were to continue going

down right of course that is not to say

that the market won't continue to go

down it can right but you've already

reached a point whereby it's really

pretty overs soap right and you've got

this two points down here as well that

gives you further conviction that if

you're assigned you can hold on to it

right so if it's oversold definitely

it's a much better position for you to

put on the put ratio spread than if it's

overbought right you notice that every

time if it's overbought take a look at

the chart right this is where the market

has gone up quite high right that is why

the stochastic label it as overbought

right so if at this point if you were to

put the put ratio spread right the

market could just come tumbling down

very quickly and you may not necessarily

be you know comfortable holding on to

the shares if you get sign right so wait

till the stochastics oversold and next

one the final one identify support level

so if the over so reading is not enough

you also want an additional defensive

measure whereby you find places where

the prices find it very difficult to go

below right so these are what you call

support levels so you can see that

prices have bounced off several times

and then it went back up now it come

back down and then it's about to test

this support level right so doesn't mean

the support level it's going to hold all

the time it's just that you know again

everything about trading and options is

about probability at least you have a

better chance of it going up so if it

does go up then the whole put ratio

spread expire worthless you just make

the full credit that you receive for

putting on the put ratio spread but if

it does go down despite all the measures

that we have in place and then now

you're assigned the 100 shares then

guess what you are already at a point

whereby the market is pretty pretty

overs right it has gone through quite a

bit and that is not to say it won't go

further down but there is a chance that

there could be a retracement back up

right or even a reversal and at the

point as long as you are in a profit you

can choose to close out those 100 shares

all right so once you've identified all

this this is where you can construct the

put ratio spread right basically you

want to construct the put ratio spread

below this support level okay so I've

already given you quite a number of

defensive measures that you can use to

further reduce the risk of this strategy

so now let's get into trade construction

because this is where a lot of people

will ask me Davis so for this strategy

what is the DTE which DTE should I go

for should I go for zero DTE or minus

one or minus 7 so that my profit you

know would have been already realized

before I actually put on the trade no

okay I'm just kidding right so the whole

idea down here is that whenever people

ask me DTE a lot of times they want to

go for the shorter ones and yes I

understand why right we want to realize

the profit very quickly and here's the

thing about this strategy for the most

part whenever I talk about you know DTE

with a lot of the strategies that I

shared on my channel I tend to go for

above 45 DT because that's where our

Edge lies right the edge where the

realize move is often time lesser than

the expected move but for this strategy

the TT selection is actually not that

important because we actually don't mind

getting into the shares right we don't

mind getting into a long stock position

so with that said there is still some

difference between the shorter DTE and

the longer DTE that you need to know in

order to crop the put ratio spread

according to your preference right so

now let's talk about the shorter DTE

first so with the shorter DTE you

actually get a higher return right so

you notice down here the ROI is higher

compared to this one and how do you

calculate the RO I is actually pretty

simple right you just take the credit

which you receive you you can see down

here

0.34 which is $34 right and then you

divide it by the strike Price Right

basically the cost of the amount that

you have to put up to Long 100 shares

for this right so basically if you were

to just calculate Roi divided by the DTE

* 365 that's how you're going to

calculate the ROI you will get a higher

return than the longer DTE right as you

can see down here I compare it with a 29

DT

but there are some slight differences

where you might consider a longer DTE

right so for example you have lesser

premium to purchase the long put spread

right you can see down here if you sell

this 134 strike you get only 34 CS so 34

cents is going to be quite difficult for

you to buy you know a bigger put spread

because you don't have that much credit

and at the same time your put ratio

spread is going to be closer to where

the current market price is right mainly

your short strike right so if you take a

look at this down here 134 it's giving

you only 34 cents that means to say that

if you want to go for a further strike a

further away strike let's say maybe 130

you're not going to get that much credit

already right it's going to be so little

that there's no point for you to even

put it on but whereas for the 29 DTE you

notice that hey you get

$243 for the same strike price what does

this mean it means that if you were to

go further out the market so maybe you

can even go to 130 maybe 128 127 and you

find that there's still some credit so

why does this play an important part

because if the market actually comes

down and you reach a point where you

want to actually get assigned or you

have to get assigned then of course

you're going to get a better entry price

if you get a further away strike price

with the longer DTE down here right so

if you're going to get a sign is it

better for you to get long at maybe the

strike price of $127 or at $134 of

course $127 so that is why you know

longer DTE will actually give you that

better strike price if you are going to

get into the long shares right so again

you get more premium to purchase the

long put spread and a put raal spread is

further away to market price only

difference or rather the small setback

is that it's a slightly lower Roi if you

would just you know get the credit but

for me I value more towards the risk

side right if the risk is to the

downside if I'm going to get into the

long shares I rather get it at a lower

price than a higher price okay so this

is on DTE selection now next let's talk

about shut strike selection where are we

going to position our short putut right

so there are two ways that you can do

this now the very first way very simple

way is just price selection basically

you choose the strike price at a place

where you don't mind going long the

shares at so let's say for example uh it

could be at a price of $50 so let's say

for example you think that $50 is what

you like then you can place it at $50

right if you are able to construct this

whole put ratio spread for a pretty

decent credit right so that's the first

way the second way is that you can use

the Delta to select your short strip

right so you use Delta as an indication

of the percentage chance of being in the

money at expiration so let's say for

example you want only a 25% chance that

you could get Bri on the short put side

then you get assigned then at this place

you can go for the 130 strike price now

the final component is the long put

strike selection so how do we Define

where we put the laput strike so if you

have a more bullish Outlook then this is

where you want to go for the further out

of the money strike right so as you can

see down here this is where the current

market price is so out of the money will

be below this current price down here so

basically the lower the price is the

more further away it is and the cheaper

the put right so if it's much further

away then you notice that the purchase

of this uh put is going to be much

cheaper so you're going to get a higher

credit for the put ratio spread and a

lower Max profit for the long put spread

right because your put spread right now

is going to be smaller so this is if

you're more bullish but if you're more

bearish you know you're not very sure or

you want to be more defensive right

you're afraid that you know the market

is going to come down then in this case

you want to go for a nearer to where the

current market price is the strike price

there and it's going to be more

expensive right as you can see down here

because you're going closer to the

current market price so at the money

strike will always be more expensive

than further out of the money so for

this is the good thing is that you have

a much defensive uh structure if the

market comes down so you actually

anticipate the market to come down you

want it to come down so that your put

spread down here you can get a much

bigger profit right the trade-off is

that you get a lower credit for the put

ratio spread that means if the market

goes up then your overall credit that

you get is going to be lesser as you can

see down here this is 50 Cents for the

previous structure you actually get much

more right you get $2 if the market

actually goes up but for this if the

market comes down then you're going to

get a higher Max profit for the long

putut spread all right so this is the

put ratio spread retirement strategy so

use it and let let me know what you

think in the comments below by the way

if you like this video then you're

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the next video