Strategy: Buy 2n ATM Puts, Expire ≥ 90 DTE
Buy n ATM Calls, Same Expiry
Price Chart: A series of strong directional price moves on a downward trending security
Current IV%: ≤ 25% (to reduce premium values)
IV Rank: ≈ 10 to 25
Trade: Buy 2n ATM put options; buy n ATM call options (All options expire ≥ 90 DTE.)
Strike Deltas: (both strikes ATM)
Long ATM Calls ≈ 0.50
Long ATM Puts ≈ −0.50
Goals: A strong directional price move benefits one of the ATM long options as it moves deeper ITM. The strip option strategy favors a price drop rather than a price rally. The opposite long option is sold as soon as the trader is confident that the directional price move will continue. The strip option strategy favors a drop rather than a rally because of the 2:1 put-to-call ratio.
Manage: Watch for a strong directional price move. Respond by selling the losing long options to recover as much premium as possible. Retain the long options as they move deeper ITM. Once a satisfactory profit is achieved, sell the remaining long options. If ample time remains, consider using the long options to cover a bull call or a bear put vertical in order to collect additional premium.
Profit: Close when the remaining options achieve a profit of 30 percent or more.
Loss: Close if the directional move changes and begins to reduce the value of the remaining options.