Winged and Ratio Spreads

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Hubert Warner
6 years ago
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1 This class is a production of Safe Option Strategies and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies presentation is strictly prohibited by law. The information presented in this class is for education purposes only. Safe Option Strategies does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any losses you may incur as a result of trading.

2 Iron Condors Credit Spread Sell to Open the Trade Bear Call Spread is Combined with a Bull Put Spread on the Same Stock in the Same Month of Expiration Cost Basis is the Total Net Credit of ALL the Options Subtracted from the Difference in The Strike Prices of the Options on Whichever Side of the Trade Has a Greater Spread. Max Risk = Cost Basis Max Reward = Net Credit of All Options. Good Target ROI is 15-50% Good Target Time in the Trade is Under 4 weeks.

3 LC SC SP LP

Short Call is placed at the December $120.00 Strike and is the primary or money making option on the Bear Call side of the trade.

Short Put is placed at the December $105.00 Strike and is the primary or money making option on the Bull Put side of the trade. Long Put is placed at the December $100.

4 Short Call is placed at the December $ Strike and is the primary or money making option on the Bear Call side of the trade. Current Price of the Stock $111 LC SC SP LP Long Call is placed at the December $ Strike and is the secondary or hedge option on the Bear Call side of the trade. Short Put is placed at the December $ Strike and is the primary or money making option on the Bull Put side of the trade. Long Put is placed at the December $ Strike and is the secondary or hedge option on the Bull Put side of the trade. As the price of the stock moves down both options on the bear call side lose value. As the price of the stock moves up both option on the bull put side lose value. For the trade to reach full profit the stock price needs to stay between the strike prices of the two short options. If one side of the trade loses, the other side automatically wins.

5 Calculating Risk to Reward Ratio 1. Max Reward = The net credit of all options. 2. Max Risk = The biggest difference in the strike prices of either side minus the net credit taken in on all options. 3. ROI is calculated by dividing the net credit by the max risk. 4. A good target ROI is 15% or more. The more the better.

6 The biggest spread we have on either side of the trade is $5.00 per share. The net credit of both sides of the trade is $0.80 per share ($0.50 for the bull put and $0.30 for the bear call). Max Risk = Biggest Difference Between the Strike Prices ($5.00) Minus the Net Credit ($ $0.80 = $4.20) ROI = Max Reward Divided by Our Max Risk ($0.80 / $4.20 = 19% ROI) Our Bull Put side of the trade gives us a net credit of $0.50 per share and a $5.00 spread between our strike prices. Our Bear Call side of the trade gives us a net credit of $0.30 per share and a $5.00 spread between our strike prices.

7 Defining our Exit Strategy 1. Primary Exit for The Iron Condor is to see All Options Lose Value Quickly and Possibly Expire Worthless. 2. The Target ROI is always fixed because the net credit is fixed once the trade is open. The target ROI should be at least 15% 3. Being in the trade for five weeks or less is ideal and if half or more of the target ROI can be captured with time still left until option expiration the trade should be closed. 4. The Adjustment or Secondary Exit will be covered in Module 6.7

8 Summary for Iron Condor 1. When a stock has established and identifiable range and has a short term expectation of staying in that range the iron condor can take advantage of this. 2. The trade works best when the level of resistance and the level of support look equally strong and the expiration date of the options is closer. 3. It is very important that there is no fixed event like an earnings report between the time the trade is open and the expiration of the options, and it is ideal to place this trade on a stock with history of ranging. 4. A good target ROI is 15-50% or more and a good expectation of time spent in the trade is less than 5 weeks (the shorter the better). 5. Rapid time decay works very well for this trade.

9 Ratio Back Spread Credit Spread Sell to Open the Trade Ratio Back Spread is a Bear Call or a Bull Put with a Larger Number of Long Options Than Short Options in Any Ratio Cost Basis is the Total Net Credit of ALL the Options Subtracted from the Difference in The Strike Price of the Short and Long Option Max Risk = Cost Basis Max Reward = Net Credit of All Options. Good Target ROI is 15-50% Good Target Time in the Trade is Under 4 weeks.

10 LC SC X2

Short Call is placed at the December $115.00 Strike and is the primary or money making option on the trade. LC SC X3 Three times as many Long Calls are placed at the December $125.

11 Short Call is placed at the December $ Strike and is the primary or money making option on the trade. LC SC X3 Three times as many Long Calls are placed at the December $ Strike are the secondary or hedge options, but can become primary if the stock movement is strong enough bullish. If the price of the stock moves down all options lose value and the trade profits by the net credit of all options. If the price of the stock moves up three times as many long calls gain value as short calls, offsetting the increased value of the short call. On a bullish move the stock price has to move higher than the strike of the long calls for the trade to get profitable. Current Price of the Stock $111

12 Calculating Risk to Reward Ratio 1. Max Reward = The net credit of all options. 2. Max Risk = The biggest difference in the strike prices of either side minus the net credit taken in on all options. 3. ROI is calculated by dividing the net credit by the max risk. 4. A good target ROI is 15% or more. The more the better.

Our net credit is $1.80 ($.30X3) = $0.90 Or $1.80 - $0.30 - $0.30 - $0.30 = $0.90 X3 STO Dec10 $115 Strike Calls for $1.

90 per share relative to our short puts. Net Credit = $0.90 per share ($1.80 - $0.

13 Our net credit is $1.80 ($.30X3) = $0.90 Or $ $ $ $0.30 = $0.90 X3 STO Dec10 $115 Strike Calls for $1.80 credit BTO Dec10 $125 Strike Calls for $0.30 debit, but we buy three times as many contracts so our debit is $0.90 per share relative to our short puts. Net Credit = $0.90 per share ($ $0.90) Max Risk = Difference Between the Strike Prices ($10.00) Minus the Net Credit ($ $0.90 = $9.10) ROI = Max Reward Divided by Our Max Risk ($0.90 / $9.10 = 10% ROI)

14 SP LP X2

15 Current Price of the Stock $111 SP LP Short Put is placed at the December $ Strike and is the primary or money making option on the trade. Twice as many Long Puts are placed at the December $ Strike and are the secondary or hedge options on the trade. If the price of the stock moves up all options lose value and the trade profits by the net credit of all options. If the price of the stock moves down twice as many long puts gain value as short puts, offsetting the increased value of the short put. On a bearish move the stock price has to move lower than the strike of the long puts for the trade to get profitable.

16 Our net credit is $0.95 ($.20 X2) = $0.55 Or $ $ $0.20 = $0.55 STO Dec10 $105 Strike Puts for $0.95 credit BTO Dec10 $95 Strike Puts for $0.20 debit, but we buy twice as many contracts so our debit is $0.40 per share relative to our short puts. Net Credit = $0.55 per share ($ $0.40) Max Risk = Difference Between the Strike Prices ($10.00) Minus the Net Credit ($ $0.55 = $9.45) ROI = Max Reward Divided by Our Max Risk ($0.55 / $9.45 = 6% ROI) X2

17 Defining our Exit Strategy 1. Primary Exit for Any Back Ratio Spread is to see All Options Lose Value Quickly and Possibly Expire Worthless. 2. The Target ROI is always fixed because the net credit is fixed once the trade is open. The target ROI should be at least 10% 3. Being in the trade for five weeks or less is ideal and if half or more of the target ROI can be captured with time still left until option expiration the trade should be closed. 4. The Adjustment or Secondary Exit will be covered in Module 6.7

18 Summary for Back Ratio Spreads 1. When a stock has established and identifiable level or support or resistance and has a short term expectation of staying above support or below resistance a back ratio spread can take advantage of this. 2. The trade works best when the level of resistance or the level of support look strong and the expiration date of the options is closer. 3. It is good to have a fixed event like an earnings report between the time the trade is open and the expiration of the options if the stock has a history of strong movement. 4. A good target ROI is 10-25% or more and a good expectation of time spent in the trade is less than 5 weeks (the shorter the better). 5. Rapid time decay works very well for this trade.

19 Other Winged Spreads 1. Butterfly Buy to Open ONE ITM option; Sell to Open TWO ATM options; Buy to Open ONE OTM option. 2. Condor Like a Butterfly except the two short options are at different strike prices.

Adjusting The Bull Call Spread

Adjusting The Bull Call Spread Module 6.1 This class is a production of Safe Option Strategies and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies presentation is strictly