Strategy: Sell 2n or 3n ATM Calls, Expire ≤ 56 DTE
Buy or Own n × 100 Shares
Price Chart: Downtrending
Current IV%: ≥ 40%
IV Rank: ≤ 30
Trade: Sell two or three ATM call options for each 100 shares of stock owned.
Typical Strike Delta:
Short Calls ≈ −0.50
Goals: This bearish premium collection strategy succeeds when the underlying stock drops in value according to the trader’s bearish bias. The premium is retained throughout the life of the option contract. The stock’s Delta value is 1.0 per share; ATM calls have a Delta of 0.50. By selling (or writing) 2 call options, the short calls partially offset the loss in stock value. Selling 3n call options increases the premium collected for additional profit, but also increases risk if the trader’s bearish bias is wrong.
Manage: This strategy nets a small return in profit when the price of the underlying stock drops. The strategy is used to both hedge (offset the loss in stock value) and return a profit in premium when the price of the underlying stock declines. If the price of the underlying reverses direction and begins to rally, close the short calls to retain as much premium as possible.
Profit: If the short call options remain OTM, either roll the short calls out and down or let them expire worthless.
Loss: Close if the price of the stock begins to rally and the premium values of the short calls begin to increase in value for a loss.