Strategy: Sell n ITM Calls, ≤ 56 DTE
Buy n ITM Calls, Higher Strike, Same Expiry
Buy n OTM Calls, Same Expiry
Sell n OTM Calls, Higher Strike, Same Expiry
Price Chart: A series of strong directional price moves
Current IV%: ≤ 25% (to reduce premium values)
IV Rank: ≈ 10 to 20
Trade: Sell n ITM call options; buy n ITM call options, higher strike; buy n OTM call options; sell n OTM call options, higher strike. (All options expire ≤ 56 DTE.)
Long ITM Call ≥ 0.50, higher strike
Long OTM Call ≤ 0.50
Short OTM Call ≤ −0.50, higher strike
Goals: An examination of the strikes of this trade and its risk profile shows how a large increase or decrease in the value of the underlying is required for this trade to offset the cost of entry. Therefore, a strong price move and careful trade management is essential for this strategy to return a profit.
Manage: Watch for a strong directional price move. Respond by closing the losing options and retaining the profitable options. For example, if the price of the underlying drops, retain the short calls and sell the long calls. Respond to a rally by closing the short calls and retaining the long calls. Consider using the long calls to anchor a bull put spread or to create a long call butterfly in response to an upward price move.
Profit: Close when the retained options achieve a profit of 30 percent or more.
Loss: Close if this trade becomes unmanageable for a return in profit.