The sunny side up trade is an original tastytrade strategy. It’s structured by buying an ATM call spread and financing the spread with the sale of a far OTM call option. For example, buying a vertical call spread (purchasing a call 1 strike ITM and selling a call 1 strike OTM) and then selling a naked call at least 84% OTM to finance the purchase of the call spread. We typically look to use the sunny side up strategy for earnings announcements where we have a strong bullish assumption.
Selling the naked call against the bullish call spread allows us to reduce our cost basis for the trade and in some instances, we will even collect a credit. This allows us to have a “free” directional play with no downside risk, although there is theoretically unlimited risk to the upside should the stock’s price move beyond the strike price of the short call. If we traded only the long call spread, we would have risk to the downside. By selling the OTM call, we are essentially transferring the downside risk to the upside.
This strategy is similar to “breaking” the wing of a butterfly trade in order to place the trade for a small credit. We generally only use this strategy for earnings announcements as the increase in implied volatility associated with earnings results in a greater credit received for selling the naked call option at a strike with a high probability of expiring OTM.
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