Here's what it looks like:
- Sell to Open QQQ 20-Oct-23 350 Put
- Buy to Open QQQ 20-Oct-23 345 Put
1. Strategy: A Bullish Credit Put Spread is a bullish strategy that involves selling a put option and buying another put option with a lower strike price on the same underlying asset and with the same expiration date. This strategy is used when the trader expects a moderate rise in the price of the underlying asset.
2. Trade setup: In this case, the trader is selling to open a put option on QQQ with a strike price of $350 and buying to open a put option with a strike price of $345. Both options expire on October 20th, 2023.
3. Premium and risk: The trader is receiving a net premium of $1.25 per share (the difference between the mid prices of the two options), for a total credit of $125 (since each contract represents 100 shares). This is also the maximum risk of the trade. The maximum loss is $375, which is the difference between the strike prices ($5) minus the net premium received ($1.25), multiplied by 100.
4. Breakeven point: The breakeven point at expiration is $348.75, which is the higher strike price minus the net premium received.
5. Probability of profit (POP): The estimated POP is 67.91%. This is a rough estimate of the chance that the trade will be profitable at expiration. Please note that this is a simplification and actual probability may vary based on factors like changes in implied volatility or the price of the underlying asset. The POP is based on the delta.
7. Days to expiration (DTE): There are 56 days left until the options expire.
2. Neutral outlook example: short iron condor (defined risk)
The second strategy we'll be looking at is the Iron Condor. An Iron Condor is an advanced options trading strategy that is designed to generate a consistent return with a high probability of success, when the expectation is that a stock or index will have lower volatility at/near expiration. The strategy involves four different contracts with the same expiration date but different strike prices.
Here's how it works:
1. Sell an out-of-the-money (OTM) put: This is a short Put at a strike price below the current price of the underlying asset. You receive a premium for selling this Put.
2. Buy an OTM put at an even lower strike price: This long put serves as protection in case the price of the underlying asset drops significantly. You pay a premium for buying this put, but less than what you received for selling the first put. The difference between the strike prices of these two puts forms the put spread.
3. Sell an OTM call: This is a short call at a strike price above the current price of the underlying asset. You receive a premium for selling this call.
4. Buy an OTM call at an even higher strike price: This long call serves as protection in case the price of the underlying asset rises significantly. You pay a premium for buying this call, but less than what you received for selling the first call. The difference between the strike prices of these two calls forms the call spread.
So, an Iron Condor consists of two vertical spreads: a put spread (for downside protection) and a call spread (for upside protection), both for the same underlying asset and with the same expiration date.
The maximum profit for an Iron Condor is the total premium received for selling the call and put spreads (minus commissions). This occurs if the price of the underlying asset is between the strike prices of the short call and short put at expiration.
The maximum risk or loss is the difference between the strike prices of either the calls or the puts (they should be the same) minus the net premium received.
Iron Condor trades are a good way to generate income in a non-volatile market, but they also require careful management due to the potential for significant losses if the price of the underlying asset moves too much in either direction.
Now let's have a look at an actual setup: