Just like each dwarf in Snow White and the 7 Dwarfs has his own unique personality, the following trading strategies each offer a unique spin to take advantage of various market environments.
Short Put- a bullish strategy, selling a put enables the trader to collect a little bit of credit while waiting for the underlying to go up. We look to place these at greater than 50% probability of profit, which is measured by the option’s delta.
- Short call- a bearish strategy, selling a call benefits from a downward move in stock price. Similar to the short put, we look for greater than 50% probability of profit (greater than 50 delta).
- Short Strangle- this is a combination of a short call and a short put. The put and call are sold at different strikes, which gives the underlying a range to move around in. This is considered a neutral trade, since we basically want the price to remain right in between our short strikes.
- Short Straddle- this is similar to a strangle except the put and call are sold at the same price, which is usually what the underlying is currently trading at (at-the-money). Another neutral trade, it is best to implement it during times of high implied volatility to take advantage of a premium crush.
- Short Put/Short Call Spread- one of my favorite strategies, the short spread gives you a credit and a defined risk. This involves selling an option near the underlying’s current price (ATM) and buying an option further out-of-the-money (OTM). For example, XYZ is trading at $100. A call spread would sell the February 105 calls and buying the 108 calls. When looking to sell a spread like this, we would look to collect 1/3 the width of the strikes, so $1 (3 * 1/3 = 1). The $1 collected is also the max profit. The max loss is equal to the difference in the strikes (108-105=3) minus credit received ($1) which is $2. If one placed this trade, they would be risking $200 to make $100. However, we normally would manage at 50% of max profit, which would be $50
- Long Put/Call Spread- this is a debit spread, best used in low IV environments. It’s basically the opposite of a short spread, meaning that you buy the near ATM option, and sell OTM. The trade is managed at 50%. So, if you bought the spread for $2, you would close when it could be sold for $3. The maximum loss is equal to $2, or what you paid to enter the trade.
- Iron Condor- another personal favorite. It’s basically a strangle with “wings” or a combination of a put spread and a call spread. It’s a defined risk, neutral trade. It’s good for beginners, but it’s a bit expensive to put on due to all the legs.
- Buy stock – 50/50 chance of making money
We can never control the market (just as Snow White could never really control her evil stepmother) but we can place strategies based on the environment, volatility, and risk tolerance.
Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.