Vertical Spread at a Glance
|Long Vertical Call||+10||-12||Short Vertical Call||-20||+22|
|Short Vertical Put||+10||-12||Long Vertical Put||-20||+22|
|Max Profit + Max Loss = 12 – 10 = $2||Max Profit + Max Loss = 22 – 20 = $2|
Shortlisting of Stock Tickers
- Must be liquid. (Trade Volume > 1 million daily).
- No trading on penny stocks, < $10
Macro Criteria for Trade
- Check Seasonal Analysis.
- Must flow with the sector seasonal, and general market sentimental.
- Check the technical chart for an opportunity.
Confirmation Criteria for Trade
- Check analyst consensus, guidance. Don’t go against their guidance.
- Check stock fundamental for stock direction probability.
- Short Float
- P/E Ratio, projecting the future stock price.
- Compute the Standard Deviation (1xSD, 2xSD) of the stock price.
- Forecast Implied Volatility. (Prefer to be higher than average)
- Choose the correct Options strategy. Bull/Bear Vertical Spread, Iron Condor.
- Short strategy at 0.25 Delta probability, near month expiration to earn the decay in premium.
- Long strategy at 0.50 Delta, far month expiration so that will not lose too much if my direction is wrong.
- Be aware of the date for Earnings (Gaps) and Dividends (ITM Options Assignment). For ETF, be aware of Triple Witching day.
- Summary by marking the advantages (+) and disadvantages (–) of each analysis.
Entry Check List
- Be aware of market news at newsmap.
- Check the coming US economic indicator calendar of events to avoid.
- Check Stock Trader’s Almanac for the week’s probability. (Be sure to look at the correct dates)
- Check Technical Analysis for a good entry.
- Minimum Risk Entry.
- Check Implied Volatility.
- Applied the relevant Options strategy.
Exit Check List
- Managing Winners
- Lock in profit
- Taking risk off the table
- Eliminate Gamma Risk
- Improve POP (probability of profit).
- Short Vertical Spread
- 50% of max profit
- Long Vertical Spread
- 25% of max profit
- Calendar Spread
- 25% of premium paid
- All short or long position MUST be close before the expiration day. Short position ITM will be assigned. Long position ITM will be automatically exercised.