Module 2 Session 9

VIDEO: 7:03 MINUTES

This session continues to define various trade strategies:

• Ratio Spreads: as we will construct here, ratio spreads allow a trader to carry equity positions at a fraction of the cost to carry using straight stock without the volatility risk associated with options.
  • Call Ratio Spread
  • Put Ratio Spread

Call Ratio Spread

• Type: Debit
  
• We BUY the options (pay the premiums)
  
• Implied Volatility: Middle – 40% - 60%
  
• Direction Bias: Bullish (3/1 reward to risk trades only)
  
• Volatility Bias: Neutral Volatility (NV)
  
• Risk/Reward Profile:
  Max Risk: Unlimited (due to the second short option)
  Max Profit: Limited (dollar difference between long and short strikes less total debit)
  
• Greek Values:
  
  • Position Delta: +25 minimum
    
  • Position Vega: Neutral (flat as possible)
    
  • Position Theta: Small Negative
    
• Position construction:
  ANCHOR: Buy 1 ATM or ITM Call expiring in more than 90 days while in a demand area
  OFFSET: Sell 2 OTM Calls for same expiration date with strike price above the supply top of range or predefined profit exit point
  
• Best Case Market Condition: The extra short unit in Ratio Spreads provides a variety of options regarding how much Vega the trader wishes to allocate to the position. Ideal way to hold long term trades and or positions with more efficient use of capital than owning stock outright and without volatility or Theta risk. When the position works to our advantage directionally it will gain more deltas the deeper in the money it goes until reaching 1:1 resulting in your position gaining more participation. Essentially you own more shares (deltas) than you started with.
  

Put Ratio Spread

• Type: Debit
  
• We BUY the options (pay the premiums)
  
• Implied Volatility: Middle – 40% - 60%
  
• Direction Bias: Bearish (3/1 reward to risk trades only)
  
• Volatility Bias: Neutral Volatility (NV)
  
• Risk/Reward Profile:
  Max Risk: Unlimited (due to the second short option)
  Max Profit: Limited (dollar difference between long and short strikes less total debit)
  
• Greek Values:
  
  • Position Delta: -25 minimum
    
  • Position Vega: Neutral (flat as possible)
    
  • Position Theta: Small Negative
    
• Position construction:
  ANCHOR: Buy 1 ATM or ITM Put expiring in more than 90 days while in a supply area
  OFFSET: Sell 2 OTM Puts for same expiration date with strike price below the demand bottom of range or predefined profit exit point
  
• Best Case Market Condition: The extra short unit in Ratio Spreads provides a variety of option regarding how much Vega the trader wishes to allocate to the position. Ideal way to hold long term trades and or positions with more efficient use of capital than owning stock outright and without volatility or Theta risk. When the position works to our advantage directionally it will gain more deltas the deeper in the money it goes until reaching 1:1 resulting in your position gaining more participation. Essentially you own more shares (deltas) than you started with.