Rising Star Teaches Me How to Trade High-Volume Options Using Ratio Strangle Spreads | Rolling Trades Series
May 28, 2021
I’m bummed that this blog does not have the functionality to add instantaneous streaming audio as soon as the page loads, because for this, my last blog post entry, I feel it's apropos to blast some Boyz II Men “End of the Road”. How awesome would that be if the guy with the super deep voice was like, “girl, you did such an awesome job learning new strategies this year. Baby please, keep trading…”
You guys this is the last episode of Rolling Trades Season 2: Rising Stars (Electric Boogaloo). For this episode I was able to learn from the Ratio King of the OC, Blake! Let’s get into it!
Blake has a great tip for all traders, you should be like the hot jock in your history class, let your group do all of the work in your class project, but you still get an “A”. Use the platform to do the legwork for you. On tastyworks there are several watchlists to utilize to your advantage.
Blake likes to use the High Options Volume watchlist, which you can sort by:
IV Rank -- if you’re looking to understand where volatility is relative to itself in a given product.
High volume or high open interest -- if you’re looking for only the most liquid products.
Earnings Date - if you’re looking to trade in order to capitalize on a crush in volatility
All in ascending or descending order depending on your preferred opportunities!
We used the tastyworks high options volume watchlist, and sorted by IV. SNAP popped up as a low cost underlying with decent IV Rank and earnings on the horizon.
Blake likes to start out by selling the strike around the 20 delta. He says, “I don’t sell an option for less than a dollar.” In this instance, we were getting around $1.15 for the 20 delta strike, so we were within his parameters.
Originally, he wanted to sell 5 of these puts and then 2 of the calls. This trade was skewed to the upside and would profit pretty quickly even on a slight move to the upside. Ratio Spreads are good for stocks that move instead of stocks that need to be pinned around a certain strike. Our goal is to manage Ratio Spreads around 25 to 50% of max profit.
In this instance though, we’re doing a twist on a ratio spread and doing a ratio strangle, wherein we sell an uneven number of calls and puts.
So originally, as a 5x2 ratio spread (5 puts to 2 calls) the buying power needed for this trade would have been around $2300 which is HALF of my account. But because we are working in ratios, guess what boys and girls, there are different metrics we can play with. Remember in school, when you’re like, “ugh I’m never gonna use this!” But math is super helpful in trading so I retract all of my sullen teen angst directed at my Calculus teacher.
So we adjusted our ratio from a 5x2 to a 2x1.
So we sold 2 puts at the 20 delta and one call at the 30 delta. So, 2 puts at 20 delta = 40 deltas minus the 30 delta from the call which nets us a 10 delta status for our position.
This means we get paid if the stock moves up even in the smallest way. Adjusting the ratio cut the buying power down to $900. My plan was to manage within 1-5 days if it hits 25% of max profitability. (I took the trade off for a winner after 2 days)
Liquidity- look for underlyings with high IV
Price- underlyings that are sub $100 are best for small accounts or else ratio spreads can get pricey
Strike Selection- Selling more puts than calls if he’s bullish and starting at around the 20 delta strike
Metrics- Doesn't like to sell an option for less than a dollar
If the stock goes down, look to roll when the loss is approaching about 50% of your max profit.
So our max profit on this trade was around $370, so if your P/L shows you down around $150 think about rolling down your call, or sell two calls against your position and have just one short put in play. Try to collect an equal amount to the loss that you’re facing on the trade. This shifts your breakeven down. Leave one put on and have 2 short calls.
So the trade ended up being a rapid winner and I was happy to have another strategy in my trading quiver. I want to extend my sincerest thanks to all of the Rising Stars this season who took time out of their busy lives to chat with a weird chick on the internet about trading.
One thing I will say is a huge takeaway from this season is that no one should trade in a bubble. Use chat boards, meetup groups, tastytrade and carrier pigeons to reach out when you have questions. The way I find myself getting better at things is to challenge myself and to learn from others who have made the same mistakes that I have.
Look, trading is complicated but it’s also fun and interesting and could possibly buy you the dirt bike of your dreams. Like the old adage says, “If you want to go fast, go alone. If you want to go far, go together.” So thanks to you guys, the awesome viewers, who also came along this journey with me. Alexa, play Boyz II Men.
If you haven't already, check out the previous episodes from this amazing season of Rising Stars:
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