Every Options Strategy (and how to manage them) | Iron Condors, Vertical Spreads, Strangles

Summary

The 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

• 📈 Understanding and managing options strategies is crucial for successful trading, with eight common strategies being the focus of the series.
• 🔄 Successful traders are prepared to make necessary adjustments to their strategies when market conditions change.
• 🏦 Short vertical spreads are a defined risk trade suitable for beginners, offering peace of mind with a known worst-case scenario.
• 📊 Profit targets for short put and call spreads are typically set at 50% of maximum profit for effective management of winners.
• 🚫 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.
• 🔄 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.
• 🔩 Iron condors are neutral strategies benefiting from minimal stock movement, combining two out-of-the-money short vertical spreads for potential profit.
• 🌉 Diagonal spreads are a hybrid strategy with both directional and time components, offering benefits from stock movement and the passage of time.
• 💸 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.
• 🛑 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

00:00

📊 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.

05:01

🔍 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.

10:02

🌐 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.

15:04

🔄 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.

20:05

💡 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.

25:06

📉 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.

30:08

🔄 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.

35:10

📚 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 stock’s 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.

Keywords

💡Options Trading

Options trading involves buying and selling options contracts on public exchanges. Options are financial derivatives based on the value of underlying securities such as stocks. The script emphasizes the importance of managing trades properly in options trading, highlighting strategies and adjustments to be made under various market conditions. For example, the discussion on short vertical spreads, iron condors, and managing winners and losers illustrates the dynamic nature of options trading and the necessity of strategic decision-making.

💡Short Vertical Spread

A Short Vertical Spread is an options trading strategy that involves selling an option at a certain strike price while simultaneously buying an option of the same type (call or put) at a lower strike price. This strategy is used to take advantage of a neutral to slightly bullish or bearish market outlook. The script describes setting up these spreads by selling an out-of-the-money option and buying a further out-of-the-money option, creating a 'safety net' and a defined risk scenario, ideal for beginners.

💡Managing Winners

Managing winners in the context of options trading refers to the strategy of closing profitable trades before expiration to lock in gains. The script suggests setting profit targets at 50% of maximum profit for strategies like short vertical spreads and iron condors. This practice helps in capitalizing on favorable moves while reducing the risk of potential market reversals that could erode the profits.

💡Managing Losers

Managing losers involves strategies to mitigate losses when an options trade moves against the initial market outlook. The script advises on strategies such as rolling the trade out to the next monthly cycle without changing strikes or adding units, especially if the position is a loser and nearing 21 days to expiry. This approach aims to manage risk and potentially recover from a losing position without increasing the original risk.

💡Iron Condor

An Iron Condor is an options trading strategy designed to profit from low volatility in the underlying asset. It involves selling an out-of-the-money call spread and an out-of-the-money put spread on the same asset and expiration date. The script outlines the setup of Iron Condors, emphasizing collecting about one-third the width of the strikes and managing winners at 50% of maximum profit, similar to short vertical spreads.

💡Implied Volatility Rank (IVR)

Implied Volatility Rank (IVR) is a metric used to determine the current implied volatility of an option against its historical implied volatility range. The script suggests using IVR as a criterion for decision-making, particularly in 'dance floor' scenarios where the market position isn't clearly profitable or losing. High IVR might indicate the potential for volatility to revert to the mean, favoring the retention of the trade, whereas a collapsed IVR might suggest exiting the trade.

💡Defined Risk

Defined risk strategies in options trading are those where the maximum potential loss is known at the time of trade entry. The script discusses short vertical spreads as an example of a defined risk strategy, highlighting its suitability for beginner traders due to the peace of mind offered by knowing the worst-case scenario upfront. This contrasts with undefined risk strategies where potential losses can be much larger and less predictable.

💡Diagonal Spread

A Diagonal Spread is an options strategy that involves two options of the same type (either two calls or two puts) with different strike prices and different expiration dates. The script describes it as a hybrid between a vertical spread and a calendar spread, providing both directional and time value opportunities. This strategy is portrayed as flexible and adaptable, ideal for low IV (implied volatility) environments.

💡Short Strangle

A Short Strangle is an undefined risk options strategy involving selling an out-of-the-money put and an out-of-the-money call on the same underlying asset and expiration date. This strategy aims to profit from low volatility in the underlying asset. The script delves into managing short strangles, from adjusting positions as the market moves to setting guidelines for exiting trades at a loss, highlighting the complexity and risk management involved in undefined risk strategies.

💡Ratio Spread

A Ratio Spread involves buying and selling an unequal number of options contracts, typically buying one option and selling two options of the same type (call or put) but with different strike prices. The script describes the setup and management of put ratio spreads, emphasizing the strategy's flexibility and the importance of collecting a significant credit upfront to enhance the economic viability of the trade.

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