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Module 4.3 Winged and Ratio Spreads Module 4.3 Winged and Ratio Spreads Winged and Ratio Spreads This class is a production of Safe Option Strategies © and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies © presentation is strictly prohibited by law. The information presented in this class is for education purposes only. Safe Option Strategies © does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any losses you may incur as a result of trading. Module 4.3 Winged and Ratio Spreads Iron Condors Credit Spread Sell to Open the Trade Bear Call Spread is Combined with a Bull Put Spread on the Same Stock in the Same Month of Expiration Cost Basis is the Total Net Credit of ALL the Options Subtracted from the Difference in The Strike Prices of the Options on Whichever Side of the Trade Has a Greater Spread. Max Risk = Cost Basis Max Reward = Net Credit of All Options. Good Target ROI is 15-50% Good Target Time in the Trade is Under 4 weeks. Module 4.3 Winged and Ratio Spreads LC SC SP LP Module 4.3 Winged and Ratio Spreads Short Call is placed at Long Call is placed at the December $120.00 the December $125.00 Strike and is the Strike and is the •As the price of the stock primary or money secondary or hedge moves down both options on making option on the option on the Bear Call the bear call side lose value. Bear Call side of the side of the trade. •As the price of the stock trade. moves up both option on the Short Put is placed at bull put side lose value. the December $105.00 LC •For the trade to reach full Strike and is the SC primary or money profit the stock price needs to making option on the stay between the strike prices Bull Put side of the of the two short options. trade. •If one side of the trade loses, the other side automatically SP Long Put is placed at wins. the December $100.00 LP Strike and is the Current secondary or hedge Price of the option on the Bull Put Stock $111 side of the trade. Module 4.3 Winged and Ratio Spreads Calculating Risk to Reward Ratio 1. Max Reward = The net credit of all options. 2. Max Risk = The biggest difference in the strike prices of either side minus the net credit taken in on all options. 3. ROI is calculated by dividing the net credit by the max risk. 4. A good target ROI is 15% or more. The more the better. Module 4.3 Winged and Ratio Spreads •The biggest spread we have on either side of the trade is $5.00 per share. •The net credit of both sides of the trade is $0.80 per share ($0.50 for the bull put and $0.30 for the bear call). •Max Risk = Biggest Difference Between the Strike Prices ($5.00) Minus the Net •Our Bull Put side of the trade gives us a Credit ($5.00 - $0.80 = $4.20) net credit of $0.50 per share and a $5.00 •ROI = Max Reward Divided by Our Max spread between our strike prices. Risk ($0.80 / $4.20 = 19% ROI) •Our Bear Call side of the trade gives us a net credit of $0.30 per share and a $5.00 spread between our strike prices. Module 4.3 Winged and Ratio Spreads Defining our Exit Strategy 1. Primary Exit for The Iron Condor is to see All Options Lose Value Quickly and Possibly Expire Worthless. 2. The Target ROI is always fixed because the net credit is fixed once the trade is open. The target ROI should be at least 15% 3. Being in the trade for five weeks or less is ideal and if half or more of the target ROI can be captured with time still left until option expiration the trade should be closed. 4. The Adjustment or Secondary Exit will be covered in Module 6.7 Module 4.3 Winged and Ratio Spreads Summary for Iron Condor 1. When a stock has established and identifiable range and has a short term expectation of staying in that range the iron condor can take advantage of this. 2. The trade works best when the level of resistance and the level of support look equally strong and the expiration date of the options is closer. 3. It is very important that there is no fixed event like an earnings report between the time the trade is open and the expiration of the options, and it is ideal to place this trade on a stock with history of ranging. 4. A good target ROI is 15-50% or more and a good expectation of time spent in the trade is less than 5 weeks (the shorter the better). 5. Rapid time decay works very well for this trade. Module 4.3 Winged and Ratio Spreads Ratio Back Spread Credit Spread Sell to Open the Trade Ratio Back Spread is a Bear Call or a Bull Put with a Larger Number of Long Options Than Short Options in Any Ratio Cost Basis is the Total Net Credit of ALL the Options Subtracted from the Difference in The Strike Price of the Short and Long Option Max Risk = Cost Basis Max Reward = Net Credit of All Options. Good Target ROI is 15-50% Good Target Time in the Trade is Under 4 weeks. Module 4.3 Winged and Ratio Spreads LC X2 SC Module 4.3 Winged and Ratio Spreads Three times as many Short Call is placed at Long Calls are placed at the December $115.00 the December $125.00 Strike and is the Strike are the •If the price of the stock primary or money secondary or hedge moves down all options lose making option on the options , but can value and the trade profits by trade. become primary if the the net credit of all options. stock movement is •If the price of the stock strong enough bullish. moves up three times as X3 LC many long calls gain value as short calls, offsetting the increased value of the short SC call. •On a bullish move the stock price has to move higher than the strike of the long calls for the trade to get profitable. Current Price of the Stock $111 Module 4.3 Winged and Ratio Spreads Calculating Risk to Reward Ratio 1. Max Reward = The net credit of all options. 2. Max Risk = The biggest difference in the strike prices of either side minus the net credit taken in on all options. 3. ROI is calculated by dividing the net credit by the max risk. 4. A good target ROI is 15% or more. The more the better. Module 4.3 Winged and Ratio Spreads •Our net credit is $1.80 – ($.30X3) = $0.90 •Or $1.80 - $0.30 - $0.30 - $0.30 = $0.90 •STO Dec10 $115 Strike Calls for $1.80 credit •BTO Dec10 $125 Strike Calls for $0.30 debit, but we buy three times as many contracts so our debit is $0.90 per share relative to our short puts. •Net Credit = $0.90 per share ($1.80 - $0.90) •Max Risk = Difference Between the Strike X3 Prices ($10.00) Minus the Net Credit ($10.00 - $0.90 = $9.10) •ROI = Max Reward Divided by Our Max Risk ($0.90 / $9.10 = 10% ROI) Module 4.3 Winged and Ratio Spreads SP LP X2 Module 4.3 Winged and Ratio Spreads •If the price of the stock moves up all options lose value and the trade profits by the net credit of all options. •If the price of the stock Short Put is placed at moves down twice as many the December $105.00 long puts gain value as short Strike and is the primary or money puts, offsetting the increased making option on the value of the short put. trade. •On a bearish move the stock price has to move lower than the strike of the long puts for SP Twice as many Long the trade to get profitable. Puts are placed at the LP December $100.00 Current Strike and are the Price of the secondary or hedge Stock $111 options on the trade. Module 4.3 Winged and Ratio Spreads •Our net credit is $0.95 – ($.20 X2) = $0.55 •Or $0.95 - $0.20 - $0.20 = $0.55 •STO Dec10 $105 Strike Puts for $0.95 X2 credit •BTO Dec10 $95 Strike Puts for $0.20 debit, but we buy twice as many contracts so our debit is $0.40 per share relative to our short puts. •Net Credit = $0.55 per share ($0.95 - $0.40) •Max Risk = Difference Between the Strike Prices ($10.00) Minus the Net Credit ($10.00 - $0.55 = $9.45) •ROI = Max Reward Divided by Our Max Risk ($0.55 / $9.45 = 6% ROI) Module 4.3 Winged and Ratio Spreads Defining our Exit Strategy 1. Primary Exit for Any Back Ratio Spread is to see All Options Lose Value Quickly and Possibly Expire Worthless. 2. The Target ROI is always fixed because the net credit is fixed once the trade is open. The target ROI should be at least 10% 3. Being in the trade for five weeks or less is ideal and if half or more of the target ROI can be captured with time still left until option expiration the trade should be closed.
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