Strategy: Buy n OTM Calls, ≤ 56 DTE
Buy n ATM Calls, Same Expiry
Sell n ITM Calls, Same Expiry
Price Chart: Uptrending
Current IV%: ≥ 40%
IV Rank: ≤ 30
Trade: Sell n ITM call options; buy n ATM call options; buy n OTM call options.
Typical Strike Deltas:
ITM Short Calls ≈ −0.55 to −0.65
ATM Long Calls ≈ 0.45 to 0.40
OTM Long Calls ≈ 0.40 to 0.35
Goals: This is a limited risk, unlimited profit strategy that relies on a strong price rally in the underlying, which places the two long call options deeper ITM. The ITM short calls are sold to offset the initial premium paid for the ATM and OTM long calls. Once satisfied with the profit, the trader will sell the long calls.
Manage: This strategy combines a bear call and a farther OTM long call. It requires a strong price rally to return a profit. The ITM short call is closed when the price of the underlying stock begins to rally according to the trader’s bullish bias. The short call could possibly jeopardize this strategy’s potential if it is nearing expiration and is assigned. When appropriate, it’s important to close the short call to eliminate this risk.
Profit: If the price of the underlying rallies, this strategy can return a profit of 50 percent or more.
Loss: If the price of the underlying remains unchanged, or even worse, drops in value, the premium value of the long call options loses value rapidly as the premium value of the short call options also drops as the options become deeper ITM. This causes the strategy to suffer a net reduction in value that may exceed 20 percent. If the long options are closed while the strike of the short options move OTM and are retained, some of the loss may be offset by letting the short call options either expire worthless or close for less premium than originally received.