Strategy: Buy 2n ATM Calls, ≤ 56 DTE
Short n × 100 Shares
Price Chart: Downtrending
Current IV%: ≥ 40%
IV Rank: ≈ 50
Trade: Buy 2n ATM call options, short n shares
Typical Strike Delta:
ATM Long Calls ≈ 0.50 (2n long call Delta = 1.0)
Goals: This is a less aggressive version of the long straddle option strategy. A price drop rewards the short stock; a price rally rewards the long 2n long calls. The net Delta value of this trade is 0 when summing the Delta value of 2n ATM long calls, which is 1.0, and the Delta value of the short stock, which is −1.0. The result is a Delta-neutral trade. If the price of the stock rallies, the long call premiums rapidly gain value as they move deeper ITM. If the stock value drops, the short stock increases in value.
Manage: When the short stock drops in value by several dollars per share, watch the overall P/L value. Consider selling the call options to recover as much premium as possible. When the short stock achieves a satisfactory profit of 30 percent or more, close the short stock position with a buy-to-cover order.
Profit: If the trader’s bearish bias is confirmed by a price drop, the trade should be closed when a profit of 30 percent or more is achieved. However, this trade has a potential for a much higher return. Retain the profitable short stock or long calls until a price reversal is detected.
Loss: If the trader’s bearish bias is wrong and the price begins to rally, the short stock position is closed and the long calls retained. If the underlying moves against the remaining position, exit the trade immediately. This trade is reasonably conservative; when a loss does occur, it is typically quite small.