Module 2 Session 8

VIDEO: 6:16 MINUTES

​This session continues to define various trade strategies:

• Vertical Debit Spreads
  • Bull Call Spread
  • Bear Put Spread

Bull Call Spread (vertical debit)

• Type: Debit
  
• We BUY the options (pay the premiums)
  
• Implied Volatility: Med/Low – 40% or less
  
• Direction Bias: Bullish (3/1 reward to risk trades only)
  
• Volatility Bias: Conservative Long Volatility (CLV)
  
• Risk/Reward Profile:
  Max Risk: Limited to total debit (premium paid for long unit minus credit received for short unit)
  Max Profit: Limited and Variable (dollar difference between long and short strikes less total debit)
  
• Greek Values:
  
  • Position Delta: +25 minimum
    
  • Position Vega: Positive (profit from rise in volatility)
    
  • Position Theta: Negative
    
• Position construction:
  ANCHOR: Buy 1 ATM Call expiring in more than 90 days while in a demand area
  OFFSET: Sell 1 ATM Call same expiration with strike price near  supply top of range or at predefined profit exit point
  
• Best Case Market Condition: Used as a directional strategy only. It is designed to be a hedge against a fall in volatility rather than a way to profit from its rise. Allows the drastic reduction of the volatility risk and Theta burn while providing the ability to capture a good part of a directional move with limited liability and capital outlay. Need to stay with candidate scoring high on the Trade Quality score sheet and carry a 3/1 reward to risk ratio
  

Bear Put Spread (vertical debit)

• Type: Debit
  
• We BUY the options (pay the premiums)
  
• Implied Volatility: Med/Low – 40% or less
  
• Direction Bias: Bearish (3/1 reward to risk trades only)
  
• Volatility Bias: Conservative Long Volatility (CLV)
  
• Risk/Reward Profile:
  Max Risk: Limited to total debit (premium paid for long unit minus credit received for short unit)
  Max Profit: Limited and Variable (dollar difference between long and short strikes less total debit)
  
• Greek Values:
  
  • Position Delta: -25 minimum
    
  • Position Vega: Positive (profit may from rise in volatility)
    
  • Position Theta: Negative/Flat
    
• Position construction:
  ANCHOR: Buy 1 ATM Put expiring in more than 90 days while in a supply area
  OFFSET: Sell 1 ATM Put same expiration with strike price near demand bottom of range or at predefined profit exit point