Strategy: Buy 2n OTM Puts, Typically ≤ 56 DTE
Sell n Puts, Higher Strike, Same Expiry
Price Chart: Downtrending
Current IV%: ≤ 25%
IV Rank: ≤ 30
Trade: Sell one or more put options; buy twice as many put options farther OTM.
Typical Strike Deltas:
Short Puts ≈ 0.30 to 0.25
Long Puts ≈ −0.25 to −0.15
Goals: A strong, sustained drop in the price of the underlying is required to move the long put deeper ITM and to achieve a profit in premium value. When the spread width of the strikes is sufficiently narrow, the premium value of the 2n long put options increases profit faster than the decline in premium value of the 1n short put options.
Manage: If the price of the underlying drops according to the trader’s bias, this 2:1 vertical bear put spread moves deeper ITM. The long put premium increases faster than that of the short put’s premium. Be prepared to close this trade when it returns a profit of more than 30 percent. If the expected drop in the price of the underlying security and the price bases is followed by a rally, close the trade to avoid losing the profit that may already exist.
Profit: Close when this trade returns a profit of 30 percent or more.
Loss: Close if this trade approaches a 10 percent loss from an unexpected price rally in the underlying security.