"How to Use Options Strategies & Key Mechanics" Takeaways
Oct 16, 2020
By: Tony Battista
tradeTALK part 5 features Tony Battista, host of tastytrade Live. Tony takes you back-to-basics by covering key option strategies to help you get back into the game!
tradeTALK Key Takeaways
How to Use Options Strategies & Key Mechanics with Tony Battista
When trading options, you have two main components to focus on: the strategies and the mechanics.
The strategy is your “plan of attack” for opening positions, while mechanics are your game plan for managing your strategies over time. Today, we’re going to overview six of the most commonly used strategies at tastytrade as well as their mechanics.
1: The short strangle is the simultaneous sale of a put and a call option. Mechanically, when utilizing this strategy, we focus on managing winning trades at 50% of the credit received, or 21 DTE (days to expiration). If the trade needs defending, you can roll the untested side, roll out in time, and/or go inverted.
2: An iron condor is the simultaneous sale of a call spread and a put spread. This purchase of the out of the money strangle limits your risk to both sides. You can also think of this as a sale of a put spread and a call spread. Like a strangle, we manage this trade at 21 DTE or 50% of credit received, whichever comes first. The nice thing about iron condors, is there is very little loss management. If the iron condor is a loser, we do not have to manage it because max loss is defined at order entry.
3: A credit spread is a directional play that has limited profits and losses. To manage winning trades, we manage at 50% of credit received or 21 DTE, whichever comes first. Like iron condors, since the risk is defined with credit spreads, there is NO loss management.
4: A ratio spread is a debit spread with the addition of a short option. The resulting trade has a very high probability of success and defined risk to one side (the debit spread). To manage, we either close out at 30% of max profit, or roll out the spread in time if it moves against us.
5: A broken wing butterfly is a defined risk play where we manage winners at 25% of max profit and do NOT manage losses due to the defined risk nature of this trade.
6: Finally, a trade strategy that we only utilize in low implied volatility environments is the diagonal. A diagonal is the purchase of a long dated option and the sale of a near term option. This makes the trader long IV. Generally, we manage at 25% of max profit, and in the event the trade goes sour, we roll the near month forward to turn the trade into a simple debit spread.
Watch Episode 5 and tune in next Thursday, October 22 at 3pm CT for Episode 6, Applying the Pareto Principle to Options Trading Concepts with Mike Butler.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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