Master Trader Option Strategies Explained

 

Note:  One (1) contract represents 100 Shares of the Underlying Stock.

 

Bull Put Credit Spread (BPS). A defined risk strategy where you make the maximum profit (net credit received) if the stock closes above the shorted put strike at expiration.  We sell a put strike price below price support where the price pattern suggests that the stock will not close under at expiry, and simultaneously purchase a lower strike put than the one sold as a hedge and to reduce the margin.

The return on investment (ROI) is the credit received divided by the maximum loss (i.e., the width of strike prices less premium received).  The break-even is the higher strike price less credit received (i.e., also your cost basis if assigned the stock).

Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern.  Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.

 

Short Naked Puts (SP).   We sell a put strike price below support where the price pattern suggests that the stock will not close under at expiry.  In exchange for the premium received, the put seller has the obligation to buy the underlying stock at the strike price sold on or before expiry at the put buyer’s discretion.

The Max Gain is the Premium received, which is realized if the stock closes above the shorted put strike at expiration.  The return on investment (ROI) is the credit received divided by the margin required to hold the position.  The break-even is the short strike price less the credit received (i.e., also your cost basis if assigned the stock).

Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern.  The trading strategy has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.

 

Long Calls (LC).   Call buyer pays a premium for the right to buy the underlying asset (stock) at a specified price (strike) for a specified period of time (expiry).  Long calls are used to capitalize on upside price movements with less cost (leverage) and to limit risk (to debit paid).

The potential Gain is unlimited; Max Loss is the Premium paid.  Break-even point is Strike Price plus the Premium paid.

Covered Call (CC).  Defined as Long Stock + Short Call (1 contract for every 100 shares).  The Premium received lowers the cost basis because selling Extrinsic Value (time decay).  Done to take in money (Premium) which increases the probability of profit.  Since the strategy is capping the gains, it is considered a Mildly Bullish directional trade.

Bull Call Diagonal (BCD).  Similar to a Bull Call Spread except the ITM Call is longer dated to take advantage of longer Directional Bullish setup.  The Max Profit (estimate) is the width of Call strikes – Debit.  Breakeven (estimate) is the Long Call strike price – Debit.

We recommend .70 Delta ITM Calls and short Calls (less than 30 DTE) above resistance where we think they will expire below at Expiry.  The goal is to profit as the stock rises with ITM Call and routinely sell OTM calls to earn $$ from time decay.

Similar to a Covered Call except ITM Call replaces the long stock.  Done to reduce the risk of loss and lower the cost of the long call.  The strategy caps the gain but increases the probability of profit because of the lower break even and it has less Max Loss than a long call only.

Bear Call Credit Spread (BCS). A defined risk strategy where you make the maximum profit (net credit received) if the stock closes below the shorted call strike at expiration.  We sell the call strike price above price resistance where the price pattern suggests that the stock will not close above at expiry, and simultaneously purchase a higher strike call than the one sold as a hedge and to reduce the margin.

The return on investment (ROI) is the credit received divided by the maximum loss (i.e., the width of strike prices less premium received).  The break-even is the short strike price plus the credit received (i.e., also your cost basis if assigned the stock).

Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern.  The trading strategy has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.

Short Naked Calls (SC).   We sell a call strike price above price resistance where the price pattern suggests that the stock will not close above at expiry.  In exchange for the premium received, the call seller has the obligation to sell the underlying stock at the strike price sold on or before expiry at the call buyer’s discretion.

The Max Gain is the Premium received, which is realized if the stock closes below the short call strike at expiration.  The return on investment (ROI) is the credit received divided by the margin required to hold the position.  The break-even is the short strike plus credit received (i.e., also your cost basis if required to short the stock).  Should this say, buy the stock?

Considered a mildly bearish strategy since we are not buying puts or shorting the stock and just calling a short-term top in the price pattern.  The trading strategy has positive theta (meaning you make money on time decay) making it a high probability trade since the entry is timed with the technical pattern.

 

Long Puts (LP).   The Put buyer pays a premium for the right to sell the underlying asset (stock) at a specified price (strike) for a specified period of time (expiry).  Long puts are used to capitalize on downside price movements with less cost (leverage) and to limit risk (to debit paid).  Potential Gain is Strike Price – Premium paid (i.e., break-even point).  Max Loss is Premium paid.

Bear Put Spread (BPS).  A defined risk strategy where you make the maximum profit if the stock closes below the shorted put strike at expiration.  We buy bearish puts and then sell a put strike price lower where the price pattern suggests that the stock will not close under at expiry to reduce the cost of the long put and generate time decay.

The return on investment (ROI) is the Gain divided by the Debit, which is the maximum loss.  The break-even is the higher strike price plus the debit paid.  Considered a mildly bearish strategy since we are not buying puts or shorting the stock and willing to cap our gains in exchange for gain from time decay.

Covered Put (CP).  Defined as being Short Stock + Short Put (1 contract short for every 100 shares short).  The premium received raises the cost basis because of selling Extrinsic Value (time decay).  Done to take in money (Premium) which increases the probability of profit.  Since capping gains it is considered a Mildly Bearish directional trade.

Bear Put Diagonal (BPD).  Similar to a Bear Put Spread except the ITM Put is longer dated to take advantage of a longer Directional Bearish setup.  Max Profit (estimate) is the width of Put strikes – Debit.

Breakeven (estimate) is the Long Put strike price – Debit.

We recommend .70 Delta ITM Puts and short Puts (less than 30 DTE) below support where think will expire above at Expiry.  The goal is to profit as the stock falls with ITM Put and routinely sell OTM puts to earn $$ from time decay.

Similar to a Covered Put except the ITM Put replaces short stock.  Done to reduce the risk of loss and lower cost of the long put.  The strategy caps the gain but increases the probability of profit because of a higher break even and less Max Loss than long put only.