tastytrade logo
uploaded image

Oct 3, 2016

How to Save Buying Power

By:Josh Fabian

One of the biggest challenges tasty bite accounts face is creating enough occurrences (trades) and maximizing return on capital. Therefore, finding ways to reduce the amount of buying power needed for a trade is of extreme benefit. Here, we will look at some ways tasty bite accounts can best maximize their available capital.

Wing It

When talking about selling a straddle, we mean selling both the at-the-money (ATM) put and call. Selling a straddle will always bring in the greatest amount of premium. However, selling a straddle can require a lot of capital to trade in your account. In QQQ for example, a straddle will cost about $2,300 in a buying power reduction (BPR). For a tasty account, that may be too much capital in one trade.

One way to reduce the amount of buying power needed in this trade is to simply buy both an out-of-the-money (OTM) put and call. Essentially, what we are doing in this trade is selling an ATM straddle and buying an OTM strangle. This type of trade is commonly referred to as an “iron fly”, which you can trade in a single order.

In an iron fly, we want to keep as much premium as possible from selling the straddle. To do that while also reducing how much buying power is required, we look to buy the ten delta put and call. By turning a straddle into an iron fly, the buying power needed drops from $2,300 to about $585 or roughly one-quarter what was needed for selling a straddle. The slide below shows what our trade looks like when comparing a straddle to an iron fly.


Selling a covered call (or a buy-write) is another common trade. In a covered call, we sell one call for every one hundred shares of stock we purchase. This creates a position with a delta of 50 if you bought 100 shares of stock with 100 delta and sold the ATM call with negative 50 delta. For tasty bite (smaller) accounts, buying one hundred shares of stock may be too much capital for one trade. However, we can create a synthetic equivalent using just options.

Using EEM as an example, buying 100 shares then selling a covered call will require about $1,100 in buying power. A synthetic equivalent to this trade with the same delta exposure can be created by simply selling an ATM put. An ATM put, just like selling a covered call, has a delta of 50. However, where selling a covered call in EEM will cost about $1,100 in buying power, selling the ATM put requires just $650.

Go High

Selling premium in times of high IV is something discussed daily on tastytrade. All tastytraders should know that selling options in times of high implied volatility (IV) increases the amount of premium collected compared with time of lower IV and it also increases our probabilities of being profitable. Another benefit to high IV is we tend to see higher levels of return on capital (ROC) compared with BPR.

When IV is high we collect greater premium selling options. That means we are taking in more premium relative to the buying power being used in a trade. In other words, we are being paid more for risk.  

All traders want to find ways to best maximize capital. For tasty bite accounts, it becomes even more important to efficiently leverage buying power in order to create enough occurrences so a portfolio is not jeopardized by one trade that moves beyond one standard deviation and that ROC is maximized.

Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

Tasty Bites | How to Save Buying Power: September 19, 2016

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.