Strategy: Buy n ITM Calls, ≤ 56 DTE
Sell n ATM Calls, Same Expiry
Sell n OTM Calls, Same Expiry
Price Chart: Uptrending
Current IV%: ≥ 40%
IV Rank: ≤ 30
Trade: Buy n ITM call options; sell n ATM call options; sell n OTM call options.
Typical Strike Deltas:
ITM Long Calls ≈ 0.55 to 0.60
OTM Short Calls ≈ −0.30 to −0.25
Farther OTM Short Calls ≈ −0.25 to −0.15
Manage: This strategy includes uncovered short calls, which requires the trader to have the highest option trading level. It is designed to collect premium by buying an ITM call option and selling two call options, one ATM and another OTM. The premium collected from the two short call options must be greater than the premium paid for the ITM call option for this strategy to be viable. The premium collected is shown above the 0 line of the Y axis on this strategy’s risk profile. The plotline also shows how a strong price move in either directional can defeat this trade. If the price of the underlying stock rallies and both short call options become ITM, close them immediately. If the price drops, sell the long call for any premium that may remain and keep the short calls as long as they remain OTM.
Profit: If the short call options both become OTM, either roll the short calls out for additional premium or let them expire worthless for a 100 percent profit.
Loss: Close if the price of the stock begins to drop and the premium of the short puts begins to increase in value for a loss. Close both positions to prevent a loss that exceeds 10 to 20 percent.