I have found this strategy to work in any IV environment. Having a higher ratio and higher spread gives lot of maneuverability to roll the short and add/remove the long puts.
You want to put on this trade in high IV environments, or at least utilize less capital during low IV. IV is mean-reverting so it'll likely go up when its down and it'll hurt this position since you are short vegas. Plus, IV is inversely correlated with the underlying asset so you have delta risk on you short puts when this happens.
I've created a synthetic diagonal/calendar using a put ratio and call credit spread for tier 2 margin accounts/cash-secured positions. The breakevens are much wider than iron butterflies/butterflies as well; however, this is used to potentially acquire shares and the BPR is large in smaller accounts. Has anyone constructed something similar? The reason I wanted this is because if diagonals or calendars are used in a high IV market, imp vol could get crushed and butterflies aren't as wide of BEs. Edit: In hindsight, the BPR is too significant for smaller accounts.
Great video, Mike. Since the value of the spread can be either positive or negative, where Spread Value = Long Value - Total Short Value, would closing the trade be known as BUYING BACK the spread or SELLING TO CLOSE the spread? Thx.
Very interesting... What if you set that up for Call AND Put side? How do you call that? Ratio Condor? In theory, you should profit on any movements or no movements at all - only movements too big would hurt you. IV increase could hurt, too.
That would just be a double ratio spread ultimately, where you have a neutral profit zone, but also have some kickers on either side if the timing is right and the stock slowly grinds towards one of your spreads at expiration.
Okay so If I’m short a put I can just add in the put debit if I’m thinking there’s more downside to reduce risk on a stock I’m looking to own? And around expiration I can lock in the debit spread, short put either close (worthless) or if itm roll down a week or two as I’m looking to get the shares the cheapest?
Somewhat correct - a ratio spread does give you a lower breakeven if you enter into the trade like that from the beginning. The potential problem with selling a put, and then buying a put spread after a drop, is that you might sell the put for $1.00 and buy the put spread for $2.00. In that case, you have a net DEBIT of $1.00, where if all options expire OTM, you just lost $1.00, instead of placing this trade for a credit up front. Otherwise, yes a put ratio has a lower breakeven than a short put on the same strike, but it also has a lower credit up front.
So if you have two puts that you’re selling and one that you’re buying and then you might have to end up buying the stock and giving it to the buyer so you would have to have a cash secured for your broker. Otherwise that would be essentially having a naked put?
Yes - if you're trading an american style option any ITM option can be exercised at any time. With that said, assignment risk is low because people that exercise their options give up all extrinsic value, so as long as there is a decent amount of extrinsic value in the option it removes a lot of the assignment risk.
Hi Mike I have a question. I deployed this strategy on EFA as a potential long stock entry. I got an 8 dollar credit but my broker made me put up 3200 in collateral for the naked short put. 8 dollar credit on 3200 is a pretty weak return should the spread expire worthless. What do you think I should do to improve the rate of return should it go up or sideways?
I would personally consider is making the embedded long put spread more narrow - the lower the max profit is, the more I'll collect up front, since the embedded long spread will cost less relative to the extra short put I'm selling to finance it. Totally up to you though!
I’m confused selling in high IV. Correct me if I’m wrong, but since you are selling at high IV, the premium that you collect will be higher because the short OTM puts will have more extrinsic value than that of the long put that’s closer to ITM. You expect an IV contraction to benefit the short puts. Although the IV contraction is bad for the long position, the extrinsic value will play less of a roll in option contracts that are closer to ITM... I also have another question... if you sell 2 contracts vs 1, do you have higher Greeks, such as VEGA, delta, Gamma, and theta ?
The 2 short options have a heavy weight against the long option - if there is a lot of extrinsic value and the stock price moves towards your short strikes where your max profit is at expiration, you'll likely see a loss, since the 2 short options extrinsic value expansion will likely offset the gain on the long option. The only situation where you can get near max profit is if there is little to no extrinsic value in the spread, so an IV contraction / theta decay should be welcomed in this strategy. The greeks CAN get higher if the spread goes deep ITM, simply because you have an extra short option that has undefined risk. Outside of that though the greeks will be somewhat muffled.
Thanks, Mike. James Cordier in his book co-authored with Michael Gross called "Selling Options" very much likes the Ratio Spreads. He, however, prefers to use a minimum 3:1 ratio and as high as 5:1 oir 6:1 as necessary. Your thoughts?
We prefer anything that allows us to route the trade for a credit - once the trade goes into the debit zone, you now have risk to one side where you wouldn't have it in a credit trade, and that reduces sustainability. Nothing wrong with levering up long options, which would reduce the credit compared to a 2:1, but we still like to stay in the credit zone for sustainability purposes. 3(long):1(short) and 5:1 can still work, but they're structured more like home run trades if you're paying debits. I would double check, they may be referring to back ratio spreads (long more than you're short) instead of front ratio spreads (short more than you're long) like tastytrade is here.
Cordiers book recommended 3 short to 1 long ratio credit spread. myvquestion mike, is how is the order executed? as a spread selling 3 otm puts abd buying 1 put above that closer to money OR as individual legs w 2 separate orders, 1 order selling the 3 puts and a separate order buying the 1 put? THSNK you in advance
You can route them in the same order at most brokerage firms, and that would allow you to get filled at the same time rather than being filled at different times with the potential of the stock price swinging and changing the price of the options. You have more price control if you get filled at the same time compared to separate orders.
tastytrade i have 1 more question if you dont mind the naivety of it. if im expecting price to go down do i do this w calls like a vertical spread would or do i do it with puts?
This is really just an OTM long put spread (debit) financed by an extra short put (credit worth more than debit). You'd give up some net credit for an embedded long spread that boosts breakeven to the downside heavily, and also adds a max profit kicker at the short strike.
It's less credit than a naked put. The long put costs more than you get for the short put aka it's a debit spread. You need the extra short put to turn the total position into a credit spread.
It depends on the situation, but I usually go for a short term expiration that offers a credit for the width I'm looking for. The lower DTE will offer a higher chance at reaching a profit near max profit, where longer DTE will offer a higher credit up front, but a lower chance at reaching max profit in the short term. Totally up to you.
2020 still watching MIKE n his WB. Video has so much information, and it Never gets old.
I have found this strategy to work in any IV environment. Having a higher ratio and higher spread gives lot of maneuverability to roll the short and add/remove the long puts.
Is this still working for you?
You want to put on this trade in high IV environments, or at least utilize less capital during low IV. IV is mean-reverting so it'll likely go up when its down and it'll hurt this position since you are short vegas. Plus, IV is inversely correlated with the underlying asset so you have delta risk on you short puts when this happens.
Thanks Mike ! For sharing your knowledge. Very helpful in my option trading learning process.
Excellent. Works beautifully as another tool in the tool kit.
Great tutorial.
Thanks for explaining in easily understandable way
Fantastic explanation! Thank you for sharing.
Wonderful Mike sir
I have just one word to describe this video. BRILLIANT. Thanks for sharing so much of in depth knowledge into options for income generation.
I've created a synthetic diagonal/calendar using a put ratio and call credit spread for tier 2 margin accounts/cash-secured positions. The breakevens are much wider than iron butterflies/butterflies as well; however, this is used to potentially acquire shares and the BPR is large in smaller accounts. Has anyone constructed something similar? The reason I wanted this is because if diagonals or calendars are used in a high IV market, imp vol could get crushed and butterflies aren't as wide of BEs.
Edit: In hindsight, the BPR is too significant for smaller accounts.
Do u have a video on put backratio. Being bullish Selling 1x ITM put and buying 2x OTM puts? pls let me know. Thanks 🙏
Amazing video. Have seen it a couple of times.
2023, still learning !!!
Great video, Mike. Since the value of the spread can be either positive or negative, where
Spread Value = Long Value - Total Short Value,
would closing the trade be known as BUYING BACK the spread or SELLING TO CLOSE the spread? Thx.
Very interesting...
What if you set that up for Call AND Put side? How do you call that? Ratio Condor?
In theory, you should profit on any movements or no movements at all - only movements too big would hurt you. IV increase could hurt, too.
That would just be a double ratio spread ultimately, where you have a neutral profit zone, but also have some kickers on either side if the timing is right and the stock slowly grinds towards one of your spreads at expiration.
is this strategy listed in your app ? I don't see them on the strategy option
Awesome!
Okay so If I’m short a put I can just add in the put debit if I’m thinking there’s more downside to reduce risk on a stock I’m looking to own? And around expiration I can lock in the debit spread, short put either close (worthless) or if itm roll down a week or two as I’m looking to get the shares the cheapest?
Somewhat correct - a ratio spread does give you a lower breakeven if you enter into the trade like that from the beginning.
The potential problem with selling a put, and then buying a put spread after a drop, is that you might sell the put for $1.00 and buy the put spread for $2.00. In that case, you have a net DEBIT of $1.00, where if all options expire OTM, you just lost $1.00, instead of placing this trade for a credit up front.
Otherwise, yes a put ratio has a lower breakeven than a short put on the same strike, but it also has a lower credit up front.
tastytrade thank you that helps a ton! Or I guess just let the market go full bull run and it didn’t even matter what puts you sold haha
its very difficult to understand on one slide of ppt. it will be better interweave with the trade platform :)
How to calculate upper/lower breakeven for one OTM short put and 2 otm short call?
ex 80 1 put sell @3
120 2 call's sell @3
80 strike - total credit for downside breakeven.
120 strike + half credit for upside breakeven.
Does time decay still work the same as a credit spread?
Show an option profit graph
Thanks!
So if you have two puts that you’re selling and one that you’re buying and then you might have to end up buying the stock and giving it to the buyer so you would have to have a cash secured for your broker. Otherwise that would be essentially having a naked put?
yes.
OK, my question is can those short put can become exercised?
Yes - if you're trading an american style option any ITM option can be exercised at any time. With that said, assignment risk is low because people that exercise their options give up all extrinsic value, so as long as there is a decent amount of extrinsic value in the option it removes a lot of the assignment risk.
Hi Mike I have a question. I deployed this strategy on EFA as a potential long stock entry. I got an 8 dollar credit but my broker made me put up 3200 in collateral for the naked short put. 8 dollar credit on 3200 is a pretty weak return should the spread expire worthless. What do you think I should do to improve the rate of return should it go up or sideways?
I would personally consider is making the embedded long put spread more narrow - the lower the max profit is, the more I'll collect up front, since the embedded long spread will cost less relative to the extra short put I'm selling to finance it. Totally up to you though!
I’m confused selling in high IV. Correct me if I’m wrong, but since you are selling at high IV, the premium that you collect will be higher because the short OTM puts will have more extrinsic value than that of the long put that’s closer to ITM. You expect an IV contraction to benefit the short puts. Although the IV contraction is bad for the long position, the extrinsic value will play less of a roll in option contracts that are closer to ITM... I also have another question... if you sell 2 contracts vs 1, do you have higher Greeks, such as VEGA, delta, Gamma, and theta ?
The 2 short options have a heavy weight against the long option - if there is a lot of extrinsic value and the stock price moves towards your short strikes where your max profit is at expiration, you'll likely see a loss, since the 2 short options extrinsic value expansion will likely offset the gain on the long option. The only situation where you can get near max profit is if there is little to no extrinsic value in the spread, so an IV contraction / theta decay should be welcomed in this strategy.
The greeks CAN get higher if the spread goes deep ITM, simply because you have an extra short option that has undefined risk. Outside of that though the greeks will be somewhat muffled.
tastytrade thanks a lot!
good
Thanks, Mike. James Cordier in his book co-authored with Michael Gross called "Selling Options" very much likes the Ratio Spreads. He, however, prefers to use a minimum 3:1 ratio and as high as 5:1 oir 6:1 as necessary. Your thoughts?
We prefer anything that allows us to route the trade for a credit - once the trade goes into the debit zone, you now have risk to one side where you wouldn't have it in a credit trade, and that reduces sustainability. Nothing wrong with levering up long options, which would reduce the credit compared to a 2:1, but we still like to stay in the credit zone for sustainability purposes. 3(long):1(short) and 5:1 can still work, but they're structured more like home run trades if you're paying debits. I would double check, they may be referring to back ratio spreads (long more than you're short) instead of front ratio spreads (short more than you're long) like tastytrade is here.
@@tastyliveshow I think @John Mascaro is talking about 3(short):1(long) instead of the 2(short):1(long) you have in video's example.
Cordiers book recommended 3 short to 1 long ratio credit spread. myvquestion mike, is how is the order executed? as a spread selling 3 otm puts abd buying 1 put above that closer to money OR as individual legs w 2 separate orders, 1 order selling the 3 puts and a separate order buying the 1 put? THSNK you in advance
You can route them in the same order at most brokerage firms, and that would allow you to get filled at the same time rather than being filled at different times with the potential of the stock price swinging and changing the price of the options. You have more price control if you get filled at the same time compared to separate orders.
tastytrade thank you
tastytrade i have 1 more question if you dont mind the naivety of it. if im expecting price to go down do i do this w calls like a vertical spread would or do i do it with puts?
@@stevek33 With puts, since most if the profit (as in the example) comes from the long put.
So it's a put debit spread plus a cash secured put. Sounds great for penny stocks.
Why don’t u make video of zero losss strategy only profit strategy
How is this different from just selling 1 put out of the money for a credit? Isn't the buying of 1 put covering the sale of the other put?
This is really just an OTM long put spread (debit) financed by an extra short put (credit worth more than debit).
You'd give up some net credit for an embedded long spread that boosts breakeven to the downside heavily, and also adds a max profit kicker at the short strike.
It's less credit than a naked put. The long put costs more than you get for the short put aka it's a debit spread. You need the extra short put to turn the total position into a credit spread.
mike what DTE would you suggest to take this ratio spread trade in European style option.
It depends on the situation, but I usually go for a short term expiration that offers a credit for the width I'm looking for. The lower DTE will offer a higher chance at reaching a profit near max profit, where longer DTE will offer a higher credit up front, but a lower chance at reaching max profit in the short term. Totally up to you.
I am not listening to mike any more. He ignores the question posed.
I did not get ruclips.net/video/7Aok7J4Gj6w/видео.html , how does selling PUT will give credit if stock goes down.
Can you make an example, any Conservative way to make a million
bruh... I love learning this stuff. This is better then porn... probably healthier too