Strategy: Sell 2n ATM Puts, ≤ 56 DTE
Short n × 100 Shares
Price Chart: Directional breakout
Current IV%: ≥ 40%
IV Rank: ≈ 50
Trade: Sell 2n ATM put options, short n × 100 shares.
Typical Strike Delta:
ATM Short Puts ≈ 0.50 (2n short put Delta = 1.0)
Goals: As shown by the plotline in this strategy’s risk profile, the short put synthetic straddle option strategy emulates a traditional short straddle (sell an ATM call, sell an ATM put). A directional move in the price of the underlying stock returns a profit from either the short stock or the two short put options, while the opposite side of the strategy is abandoned. Therefore, check the price charts for stocks that typically make strong, directional breakouts.
Manage: Like the long put synthetic strategy, this is also an example of a Delta-neutral option strategy. The net Delta is 0 by adding the −1.0 Delta of the short stock and the two +0.5 Deltas of 2n short put options. If the stock price drops in value, the stock is retained and the short put options are sold to prevent them from moving ITM for a loss and possible assignment. Conversely, if the stock price increases in value, the stock is sold and the short puts are kept as the premium begins to drop below the amount initially received—one of this strategy’s goals. Once the losing side of this trade is closed, carefully monitor the remaining position and be prepared to close it if a reversal in the price of the stock occurs. If the stock is kept because of a drop, consider selling OTM put options below a Delta 0.25 for a few more dollars in premium income.
Profit: If a substantial directional price move occurs (either up or down) and the trade is carefully managed, this strategy can quickly return hundreds if not thousands of dollars in profit. This amount is based on the number of shares and option contracts involved in the trade.
Loss: If the price of the underlying stalls and both the stock and the short puts are kept, Theta will begin to reduce the premium value of the short put options in the trader’s favor. And, of course, if one side of this trade is closed on the basis of a directional move and the price reverses direction, close the remaining position to either retain the position’s current profit or prevent what could become a substantial loss.