Strategy: Sell 2n ATM Calls, Expire ≤ 56 DTE
Short n × 100 Shares
Price Chart: Uptrending
Current IV%: ≥ 40%
IV Rank: ≤ 30
Trade: Sell two or three ATM put options for each 100 shares of stock owned.
Typical Strike Delta:
Short Puts ≈ 0.50
Goals: This is a bullish bias premium collection strategy. If the price of the underlying stock rallies in value, the premium is retained throughout the life of the option contracts. The stock’s Delta value is 1.0 per share; ATM calls have a Delta of 0.50. By selling (or writing) 2 put options, the short puts partially offset the loss in stock value. Selling 3n put options increases the premium collected for additional profit, but also increases risk if the trader’s bullish bias is wrong.
Manage: This strategy collects premium by selling put options. It is superior to the ratio call write described previously, because the stock value is increasing rather than dropping, and the premium collected by selling the short puts adds to the increase in stock value. If the price of the underlying reverses direction and begins to drop, close the short calls immediately in order to retain as much premium as possible.
Profit: If the short put options remain OTM, either roll the short puts out and up or let them expire worthless.
Loss: Close if the price of the stock begins to drop and the premium of the short puts begins to increase in value.