OPTION TRADING STRATEGIES

TRADE LEVEL 1 OPTION STRATEGIES

Long Call

A long call is the purchase of a call at a specific strike price.  As the owner of the long call, you have the right but not the obligation to purchase the underlying instrument at the specified strike price on or before the specified expiration date.  This is a bullish strategy as the value of the call increases as the price of the underlying instrument increases. As with any long option, an increase in volatility has a positive financial effect on the long call strategy while decreasing volatility has a negative effect. Time decay has a negative effect.

Unlimited Profit Potential

Since they can be no limit as to how high the stock price can be at expiration date, there is no limit to the maximum profit possible when implementing the long call option strategy.

The formula for calculating profit is given below:

–Maximum Profit = Unlimited

Profit Achieved When Price of Underlying >= Strike Price of Long Call + Premium Paid

Profit = Price of Underlying – Strike Price of Long Call – Premium Paid

Limited Risk

Risk for the long call options strategy is limited to the price paid for the call option no matter how low the stock price is trading on expiration date.

The formula for calculating maximum loss is given below:

Max Loss = Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point(s)

The price or the underlying instrument at which break-even is achieved for the long call position can be calculated using the following formula.

Breakeven Point = Strike Price of Long Call + Premium Paid

 

Long Put

The long put option strategy is a basic strategy in options trading where the investor buys a put option(s) with the belief that the price of the underlying security will go significantly below the striking price before the expiration date.

Put Buying vs. Short Selling

Compared to short selling the stock, it is more convenient to bet against a stock by purchasing put options as the investor does not have to borrow the stock to short. Additionally, the risk is capped to the premium paid for the put options, as opposed to unlimited risk when short selling the underlying stock outright.

However, put options have a limited lifespan. If the underlying stock price does not move below the strike price before the option expiration date, the put option will expire worthless.

“Unlimited” Potential

Since stock price in theory can reach zero at expiration date, the maximum profit possible when using the long put strategy is only limited to the striking price of the purchased put less the price paid for the option.

The formula for calculating profit is given below:

Maximum Profit = Unlimited

Maximum Profit Achieved When Price of Underlying = 0

Profit = Strike Price of Long Put – Premium Paid

Limited Risk

Risk for implementing the long put strategy is limited to the price paid for the put option no matter how high the stock price is trading on expiration date.

The formula for calculating maximum loss is given below:

Max Loss = Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

Breakeven Point(s)

The price of the underlying stock or ETF at which break-even is achieved for the long put position can be calculated using the following formula.

Breakeven Point = Strike Price of Long Put – Premium Paid

Covered Call

A covered call is a combination of a long stock position with the sale of a call. As an investor/trader using the Probability Based Trading (PBT) method, selling covered calls against long the stock can limit the profitability in order to increase probability of success.

Using the covered call option strategy, the investor gets to earn a premium writing calls while at the same time appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares.

By selling a covered call against long stock the cost basis is reduced by the premium collected for the short call. The short call that is sold against the stock is usually in the front month (about 45 days to expiration) and one strike out of the money (OTM).  This short call should have a probability of expiring ITM of about 30%. This bullish strategy is best used in low priced stocks with high volatility. (IVR > 50)

Limited Profit Potential

In addition to the premium received for writing the call, the OTM covered call strategy’s profit also includes a paper gain if the underlying stock price rises, up to the strike price of the call option sold.

The formula for calculating maximum profit is given below:

Max Profit = Premium Received – Purchase Price of Underlying + Strike Price of Short Call – Commissions Paid

Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

Unlimited Loss Potential

Potential losses for this strategy can be very large and occurs when the price of the underlying security falls. However, this risk is no different from that which the typical stockowner is exposed to. In fact, the covered call writer’s loss is cushioned slightly by the premiums received for writing the calls.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying < Purchase Price of Underlying – Premium Received

Loss = Purchase Price of Underlying – Price of Underlying – Max Profit + Commissions Paid

Breakeven Point(s)

The underlying price at which break-even is achieved for the covered call (OTM) position can be    calculated using the following formula.

Breakeven Point = Purchase Price of Underlying – Premium Received

The investor/trader may chose to roll a covered call when the assumption remains the same (that the price of the stock will continue to rise). Rolling the short call should occur when the option has little to no extrinsic value.

If the underlying is at or about the same level as when the trade was placed, simply roll out to the same strike to the next month when most or all of the extrinsic value is gone from the short covered call.

Leveraged Covered Call

A leveraged covered call is very similar to a traditional covered call strategy, but is structured a little bit differently. Instead of buying stock and selling a near term call, we buy a LEAP (long-term option) as a surrogate for stock (or ETF).  The leap that we buy is 1 strike ITM or more (70 delta), and sell a near term call against it that is one strike OTM (70% Probability OTM).  The objective is to buy a LEAP that will perform similarly to price changes in the underlying instrument.

The purchase of a longer-dated ITM call option minimizes the extrinsic value and theta decay in our long option. A leveraged covered call can be thought of as a directional diagonal trade over a longer time horizon.

Compared to a traditional covered call, an advantage of a leveraged covered call is that it significantly reduces the margin requirement necessary to make the trade.  As a result the return on capital for the leveraged covered call will be much higher than the traditional covered call strategy.

When selecting an underlying instrument as a possible leveraged covered call candidate we tend to look for stocks with lower volatility. We do this because the strategy will maximize returns if there is little movement in the underlying. One of the most important things to look for when considering leveraged covered call candidates is liquidity. Deep ITM options generally have wider spreads, especially when they are longer-dated options. A leveraged covered call is an excellent way to capture the natural theta decay of an option and is also a great way to improve return on capital.

Leveraged Covered Put

This strategy is the opposite of a leveraged covered call. The leveraged covered put is a synthetic covered put position that is created by purchasing an ITM (in the money) put option (that expires further out in time) and then selling an OTM (out of the money) put option in the front month’s expiration cycle. The ITM put is purchased to synthetically create the short stock position that we would normally have when trading a traditional covered put. The objective is to buy a LEAP that will perform similarly to price changes in the underlying instrument.

The purchase of a longer-dated ITM put option minimizes the extrinsic value and theta decay in our long option. A leveraged covered put can be thought of as a directional diagonal trade over a longer time horizon.

We sell the OTM put to capture extrinsic value and reduce our cost basis when purchasing the long put option. We typically sell the OTM put option in the front month when it has around a 65% probability of expiring OTM. While we use this probability of expiring OTM as a benchmark, we also take extrinsic value into consideration when selecting our strikes. We practice selling a strike in the front month with the same or more extrinsic value as the longer dated strike we are buying. If we end up paying more in extrinsic value for our long option, this can result in a situation where we’re directionally right, but we lose money as a result of a decrease in the long option’s extrinsic value.

Additionally, another very important thing to watch for when employing both this strategy and the leveraged covered call is the theta decay of the long and short options. We always want to have positive theta values, or in other words, the positive decay on our short option is larger than the negative decay on our long option. As time passes, the negative theta on the long-dated put will grow, making it harder to offset with our near-term short option. Because of this, we may roll our short option to a different expiration, if the DTE (days to expiration) on that option gets too low and we wish to continue the trade.

When selecting an underlying instrument as a possible leveraged covered Put candidate we tend to look for stocks with lower volatility. We do this because the strategy will maximize returns if there is little movement in the underlying. One of the most important things to look for when considering leveraged covered put candidates is liquidity. Deep ITM options generally have wider spreads, especially when they are longer-dated options. A leveraged covered put is an excellent way to capture the natural theta decay of an option and is also a great way to improve return on capital.

Vertical Spreads - Overview

Credit Spreads & Debit Spreads

A vertical spread is made up of a short option and a long option at different strike prices in the same expiration cycle. This is a defined-risk strategy to use when we have a bearish (stock will go down) or bullish (stock will go up) assumption. By trading in the same cycle we maintain a linear relationship between both options.

There are two distinct variations of vertical spreads.  One is a vertical credit spread and the other is a vertical debit spread.  Both strategies are very simple but are distinct in the probability of profit and the IV Percentile parameters.

Additionally there are two types of vertical credit spreads, call credit spreads and put credit spreads.  There are also two types of vertical debit spreads, call debit spread and put debit spread.  Both are defined risk strategies.  In the credit spread we are receiving premium and in the debit spread we are paying premium.

IV rank is the “secret sauce” and is the single most important factor in the decision to buy or sell vertical spreads. When IV rank is below 50, we look to buy spreads hoping for IV expansion. When IV rank is above 50, we look to sell spreads hoping for IV contraction.

Call Credit Spread

The vertical call credit spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go down moderately in the near term. With the vertical call spread option strategy premium is received as a credit upon entering the trade.

Vertical call credit spreads can be implemented by buying call options of a certain strike price and selling the same number of call options of lower strike price on the same underlying security expiring in the same month.

Limited Downside Profit

The maximum gain attainable using the bear call spread options strategy is the credit received upon entering the trade. To reach the maximum profit, the stock price needs to close below the strike price of the lower striking call sold at expiration date where both options would expire worthless.

The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

Breakeven Point(s)

The underlying price at which break-even is achieved for the bear call spread position can be calculated using the following formula.

Breakeven Point = Strike Price of Short Call + Net Premium Received

Put Credit Spread

The put spread credit option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term. With the vertical put spread option strategy premium is received as a credit upon entering the trade.

Put credit spreads can be implemented by selling an ATM or OTM put option and buying a put option one or more strikes below on the same underlying stock with the same expiration date.

Limited Upside Profit

If the stock price closes above the higher strike price on expiration date, both options expire worthless and the bull put spread option strategy earns the maximum profit which is equal to the credit taken in when entering the position.

The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying >= Strike Price of Short Put

Limited Downside Risk

If the stock price drops below the lower strike price on expiration date, then the bull put spread strategy incurs a maximum loss equal to the difference between the strike prices of the two puts minus the net credit received when putting on the trade.

The formula for calculating maximum loss is given below:

Max Loss = Strike Price of Short Put – Strike Price of Long Put Net Premium Received + Commissions Paid

Max Loss Occurs When Price of Underlying <= Strike Price of Long Put

Breakeven Point(s)

The underlying price at which break-even is achieved for the put credit spread position can be calculated using the following formula.

Breakeven Point = Strike Price of Short Put – Net Premium Received

Call Debit Spread

The call debit spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go up moderately in the near term

Call debit spreads can be implemented by buying a lower strike in-the-money call option and selling a higher strike out-of-the-money call option of the same underlying security with the same expiration date.

By shorting the out-of-the-money call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price soars. The call debit spread options strategy is also known as the (bull call debit spread) as a debit is taken upon entering the trade.

Limited Upside Profit

To reach maximum profit, the stock price needs to close above the strike price of the out-of-the-money calls on the expiration date. Both options expire in the money but the lower strike call that was bought will have higher intrinsic value than the higher strike call that was sold. Thus, maximum profit for the call debit spread option strategy is equal to the difference in strike price minus the debit taken when the position was entered.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Long Call – Strike Price of Short Call – Net Premium Paid – Commissions Paid

Max Profit Achieved When Price of Underlying  => Strike Price of Short Call

Limited Upside Risk

If the stock price falls below the in-the-money call option strike price at the expiration date, then the call debit spread strategy suffers a maximum loss equal to the debit taken when putting on the trade.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point(s)

The underlying price at which break-even is achieved for the call debit spread position can be calculated using the following formula.

Breakeven Point = Strike Price of Long Put – Net Premium Paid

Put Debit Spread

The put debit spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go down moderately in the near term.

Put debit spreads can be implemented by buying a higher strike in-the-money put option and selling a lower strike out-of-the-money put option of the same underlying security with the same expiration date.

By shorting the out-of-the-money put, the options trader reduces the cost of establishing the bearish position but forgoes the chance of making a large profit in the event that the underlying asset price plummets. The put debit spread options strategy is also know as the (bear put debit spread) as a debit is taken upon entering the trade.

Limited Downside Profit

To reach maximum profit, the stock price needs to close below the strike price of the out-of-the-money puts on the expiration date. Both options expire in the money but the higher strike put that was purchased will have higher intrinsic value than the lower strike put that was sold. Thus, maximum profit for the bear put spread option strategy is equal to the difference in strike price minus the debit taken when the position was entered.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Long Put – Strike Price of Short Put – Net Premium Paid – Commissions Paid

Max Profit Achieved When Price of Underlying <= Strike Price of Short Put

Limited Upside Risk

If the stock price rise above the in-the-money put option strike price at the expiration date, then the put debit spread strategy suffers a maximum loss equal to the debit taken when putting on the trade.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

Breakeven Point(s)

The underlying price at which break-even is achieved for the put debit spread position can be calculated using the following formula.

Breakeven Point = Strike Price of Long Put – Net Premium Paid

Iron Condor

An iron condor is a defined risk, non-directional trade that is structured using an OTM call credit spread and an OTM put credit spread in the same expiration cycle.  As a probability based trading strategy we look to sell the iron condor when the IV Rank is 50% or more.  The anticipation is the underlying instrument will remain between the two short strikes and the time value (theta decay) will generate incremental daily profits.  Additionally the anticipated volatility contraction also positively adds to the potential profitably of the trade.

Limited Profit
Maximum gain for the iron condor strategy is equal to the net credit received when entering the trade.  Maximum profit is attained when the underlying stock price at expiration is between the strikes of the call and put sold. At this price, all the options expire worthless.
Max Profit = Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying is in between Strike Prices of the Short Put and the Short Call
Limited Risk
Maximum loss for the iron condor spread is also limited but significantly higher than the maximum profit. It occurs when the stock price falls at or below the lower strike of the put purchased or rise above or equal to the higher strike of the call purchased. In either situation, maximum loss is equal to the difference in strike between the calls (or puts) minus the net credit received when entering the trade.
The formula for calculating maximum loss is given below:

Max Loss = Strike Price of Long Call(or Put) – Strike Price of Short Call(or Put) – Net Premium Received + Commissions 

       Max Loss Occurs When Price of Underlying >= Strike Price of Long Call OR  Price of Underlying <= Strike Price of Long                 Put

Breakeven Point(s)

There are 2 break-even points for the iron condor position. The breakeven points can be calculated using the following formulae
Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

  Lower Breakeven Point = Strike Price of Short Put – Net Premium Received

Naked and Cash Secured Short Puts

The naked short put (and cash secured put) is a basic conservative strategy of the probability based trading strategy. The “naked” short put is the sale of an ATM or OTM put on an underlying instrument in which your bias is neutral to bullish.

The naked short put indicates that the seller has not reserved cash on hand to purchase the underlying instrument at the specified strike price.  The cash secured put indicates the seller has set aside sufficient cash to purchase the underlying instrument at the specified strike price.  IRA accounts require that all short puts be cash secured.

Selling the put obligates the seller to buy the underlying instrument at the specified strike price if the options is assigned.

As a PBT trader typically naked short puts are sold when the IV Percentile is greater than 50%.

The maximum potential profit is the amount of the premium collected when the trade is executed.  The break-even is the strike price of the put sold minus the premium received for the put.

The maximum potential loss is substantial, but limited to the strike price of the put that was sold minus the premium received if the underlying instrument goes to zero.

TRADE LEVEL 2 OPTION STRATEGIES

Super Bull
The super bull strategy is the combination of a call debit spread and a short naked put.  The naked short is typically sold at the 1 Standard Deviation (84% Probability OTM).  The premium from the sale of the short naked put is typically target to cover the cost of the call debit spread.

 

By receiving enough premium to cover the cost of purchasing the call debit spread the trader’s cash outlay is zero or a small credit.  However there is still a margin requirement (buying power reduction) for the naked put exposure.

Putting on the trade for zero or a small credit also serves to eliminate a potential loss on the trade if the underlying does not move up or even moves slightly down during the term of the trade as long as the price of the underlying stays above the short naked put.

The super bull is a obviously a bullish strategy as the name would imply but the potential profits are limited to the width of the call debit spread.  There is theoretically unlimited risk on the naked put side of the trade as a result of the short naked (uncovered) put.

Iron Butterfly (Iron Fly)
The iron butterfly spread is a defined risk, limited profit trading strategy that is structured for a larger probability of earning a smaller limited profit when the underlying stock is perceived to have a high IV percentile. This is a short ATM straddle with defined risk. Another way to picture this strategy is by setting up an iron condor where the short strikes are the same.  This strategy in a low IV environment can still generate a positive P&L and is sometimes a better strategy to use than a short ATM straddle

 

Limited Profit

Maximum profit for the iron butterfly strategy  is attained when the underlying stock price at expiration is equal to the strike price at which the call and put options are sold. At this price, all the options expire worthless and the options trader gets to keep the entire net credit received when entering the trade as profit.

The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Call/Put

Limited Risk

Maximum loss for the iron butterfly strategy is also limited and occurs when the stock price falls at or below the lower strike of the put purchased or rise above or equal to the higher strike of the call purchased. In either situation, maximum loss is equal to the difference in strike between the calls (or puts) minus the net credit received when entering the trade.

The formula for calculating maximum loss is given below:

Max Loss = Strike Price of Long Call – Strike Price of Short Call – Net Premium Received + Commissions Paid

Max Loss Occurs When Price of Underlying >= Strike Price of Long Call OR Price of Underlying <= Strike Price of Long Put

Breakeven Point(s)

There are 2 break-even points for the iron butterfly position. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Strike Price of Short Call + Net Premium Received

Lower Breakeven Point = Strike Price of Short Put – Net Premium Received

Skewed Iron Condor
A skewed iron condor is a defined risk strategy that combines an iron condor and an embedded call spread. It takes what is a normally non-directional trade and makes it directional.  It can also be directional through strike selection

 

With a normal iron condor we would sell the call spread and the put spread at the same width, but with a skewed iron condor we might sell a $1 wide put spread and a $2 wide call spread to create the skewed iron condor. We use this strategy in a high IV Percentile environment or when we have a directional bias (selling into strength or buying into weakness).

Skewing one side of the iron condor essentially transfers the risk from one side of the trade to the other, adding a delta component. For example, if we wanted to add positive deltas to our iron condor, we would open up the put side of the trade. This would transfer risk from the call side to the put side which would make this a slightly bullish trade. If we didn’t want to widen the strikes but wanted the positive delta component, we would place the put side of the trade closer to ATM while moving the call side further away from ATM. This type of iron condor will be discussed further in another section.

The skewed iron condor is a strategy that works in all environments. We can skew the side that works best for the volatility environment we are in, but no matter what, we want IV to go higher in order to give us a better opportunity to make money.

Covered (Risk Defined)Strangle
A covered strangle is a also a neutral, defined risk strategy.  In a conventional strangle the short calls and puts are typically sold at the 1 Standard Deviation strike (approximately 84% OTM).

 

Contrary to the regular strangle which has undefined (unlimited) risk, the covered strangle “wings” are added on the call and put sides to define risk.  The “wings” can be placed from 5 strikes or more away from the short strikes.  Oftentimes the long options are placed 20 to 30 points away from the short strikes.

In essence the covered strangle is a conventional 1 standard deviation strangle but with defined risk allowing it to be traded in small accounts, IRA accounts and accounts that are not permissioned for undefined risk trades.  (usually Tier 3 permission)

Looking at the risk graph for the covered strangle you can easily see that the strategy looks exactly like an Iron Condor.  The primary difference is while the “profit zone” is wider that a regular Iron Condor it is flatter relative to risk and the potential loss is much greater than is experienced with the Iron Condor.

Like other premium selling strategies the covered strangle is sold in high IV Rank environments.

50/50 Iron Condor
A  50/50 iron condor is an iron condor (IC) with short strikes that are much closer to the underlying’s price that are typical with a standard iron condor. While this strategy generates a higher credit at entry it has a lower probability of profit.

 

The structure for this strategy is to place the short options at approximately the 75% probability OTM.  The placement of the long options is discretionary but the intention is to place the long options at strikes that will collect the premium at approximately 50% of the spread risk for the trade.

50/50 iron condors are entered in periods of high volatility.  Because of the nature of the 50/50 iron condor this strategy is great for earnings trades.  The ideal scenario for using the low risk iron condor for earnings plays is to collect premium that is equal to the expected move on the earnings announcement.

For regular iron condors the  strategy is to sell ICs right around a one standard-deviation (1SD) move and collecting premium equal to one third the width of the strikes.  The trade off is selling iron condors at the one standard deviation strikes will offer a higher probability of profit (POP) but the credit is significantly less.  If a regular iron condor becomes a full loser, the amount of money lost is more than is realized on a 50/50 risk iron condor.  It is important to always remember that reward is directly related to risk.

Call Calendar Spread
The neutral calendar spread strategy involves buying long term calls and simultaneously writing an equal number of near-month at-the-money or slightly out-of-the-money calls of the same underlying security with the same strike price.

 

The options trader applying this strategy is neutral towards the underlying for the short term and is selling the near month calls to profit from their rapid time decay. Ideally, the short option is close to ATM or slightly OTM so that our theta decay is maximized, reducing our cost basis significantly. Because the short option’s expiration is always less than the long option’s expiration, there is an opportunity to reduce cost basis multiple times by rolling the short option.

It is important to note that volatility effects long-term options more than short-term options. Although an increase in volatility may negatively affect the short-term option, it will be positively offset by the long-term option. With that said, the most important thing to keep in mind is that the strategy is for the short-term option to expire ATM, or slightly OTM.

Due to the nature of a calendar spread, we buy them in low volatility environments with the assumption that the underlying’s price will hover in a tight range for a specified period of time (the expiration of the long option). More importantly, if there is an expansion in volatility that affords the opportunity to reach maximum profit. Profit is still achievable if volatility stays the same or decreases somewhat, but the break-even points are much tighter respectively.

Limited Profit Potential

The maximum possible profit for the neutral calendar spread is limited to the premiums collected from the sale of the near month options minus any time decay of the longer term options. This happens if the underlying stock price remains unchanged on expiration of the near month options.

Limited Downside Risk

The maximum possible loss for the neutral calendar spread is limited to the initial debit taken to put on the spread. It occurs when the stock price goes down and stays down until expiration of the longer term options.

Put Calendar Spread
The neutral calendar spread strategy involves buying long term puts and simultaneously writing an equal number of near-month at-the-money or slightly out-of-the-money puts of the same underlying security with the same strike price.

 

The options trader applying this strategy is neutral towards the underlying for the short term and is selling the near month puts to profit from their rapid time decay. Ideally, the short option is close to ATM or slightly OTM so that our theta decay is maximized, reducing our cost basis significantly. Because the short option’s expiration is always less than the long option’s expiration, there is an opportunity to reduce cost basis multiple times by rolling the short option.

It is important to note that volatility effects long-term options more than short-term options. Although an increase in volatility may negatively affect the short-term option, it will be positively offset by the long-term option. With that said, the most important thing to keep in mind is that the strategy is for the short-term option to expire ATM, or slightly OTM.

Due to the nature of a calendar spread, we buy them in low volatility environments with the assumption that the underlying’s price will hover in a tight range for a specified period of time (the expiration of the long option). More importantly, if there is an expansion in volatility that affords the opportunity to reach maximum profit. Profit is still achievable if volatility stays the same or decreases somewhat, but the break-even points are much tighter respectively.

Limited Profit Potential

The maximum possible profit for the neutral calendar spread is limited to the premiums collected from the sale of the near month options minus any time decay of the longer term options. This happens if the underlying stock price remains unchanged on expiration of the near month options.

Limited Downside Risk

The maximum possible loss for the neutral calendar spread is limited to the initial debit taken to put on the spread. It occurs when the stock price goes down and stays down until expiration of the longer term options.

Diagonal Spreads - Overview
A diagonal spread is a directional, defined-risk spread that combines the time and volatility assumption of a calendar spread with the directional assumption of a vertical spread. To create a diagonal spread, we buy a long-term option and sell a short-term option at a different strike price. Typically, the short option will be further OTM than the long option.

 

Similar to calendar spreads, when we buy a diagonal spread we are hoping for an expansion in volatility, thus increasing the value of our long option. We are also hoping that the price of the underlying trades near the strike of our short option or slightly OTM, just like calendar spreads. The main difference between diagonal and calendar spreads is that the short and long options have different strike prices.

The most important aspect to remember is that we are combining a vertical spread with a calendar spread. Relative to a calendar spread, this combination increases our probability of profit and also increases our directional risk. To learn more, check out calendar spreads and vertical spreads.

Put Diagonal Spread
The put diagonal spread strategy involves buying a long term put and simultaneously selling a  near-month put of the same underlying stock with a lower (farther OTM) strike.

 

For the probability based trader a put is bought in the back (next) month (or farther out) and a put is sold in the near (front) month one or more strikes farther OTM.

This strategy is typically employed when the options trader is bearish on the underlying stock over the longer term but is neutral to mildly bearish in the near term.

Here is an example:

–The current month is March.  The trader anticipates the underlying instrument gradually trending lower in the future.  The trader executes the strategy by buying a put at or slightly OTM one month (April) or farther out and simultaneously selling the March put at one strike lower than the put that was bought.  The trade is entered for a debit.

This strategy has risk limited to the debit paid for the trade at entry.

Call Butterfly Spread
The butterfly spread is a neutral strategy that is a combination of a call credit spread and a call debit spread. It is a limited profit, limited risk options strategy. There are 3 strike prices involved in a butterfly spread. This spread is typically created using a ratio of 1-2-1 (+1 ITM option, -2 ATM options, +1 OTM option). Investors have the choice to either buy or sell butterfly spreads, but in the PBT methodology the preferred method is to buy call butterfly spreads to take advantage of the non-movement of an underlying stock. A resulting net debit is taken to enter the trade.

 

In trading a butterfly spread, the investor is expecting that the price is going to stay within a relatively tight range. This is a low probability trade, but if this strategy is entered when implied volatility is high, the butterfly spread then trades cheaper. The spread trades cheaper in this situation since the price of the ITM option consists primarily of intrinsic value, therefore selling the ATM options covers a higher percentage of the cost of purchasing both of the long options.

Limited Profit

Maximum profit for the long call butterfly spread is attained when the underlying stock price remains unchanged at expiration. At this price, only the lower striking call expires in the money.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Short Call – Strike Price of Lower Strike Long Call – Net Premium Paid – Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Calls

Limited Risk

Maximum loss for the long butterfly spread is limited to the initial debit taken to enter the trade plus commissions.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Call OR Price of Underlying >= Strike Price of Higher Strike Long Call

Breakeven Point(s)

There are 2 break-even points for the butterfly spread position. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Strike Price of Higher Strike Long Call – Net Premium Paid

Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid

 

Put Butterfly Spread
The put butterfly spread is a neutral strategy that is a combination of a put credit spread and a put debit spread. It is a limited profit, limited risk options strategy. There are 3 strike prices involved in a put butterfly spread. This spread is typically created using a ratio of 1-2-1 (+1 ITM option, -2 ATM options, +1 OTM option). Investors have the choice to either buy or sell put butterfly spreads, but in the PBT methodology the preferred method is to buy put butterfly spreads to take advantage of the non-movement of an underlying stock. A resulting net debit is taken to enter the trade.

 

In trading a put butterfly spread, the investor is expecting that the price is going to stay within a relatively tight range. This is a low probability trade, but if this strategy is entered when implied volatility is high, the put butterfly spread then trades cheaper. The spread trades cheaper in this situation since the price of the ITM option consists primarily of intrinsic value, therefore selling the ATM options covers a higher percentage of the cost of purchasing both of the long options.

Limited Profit

Maximum profit for the long put butterfly spread is attained when the underlying stock price remains unchanged at expiration. At this price, only the higher strike put expires in the money.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Short Put – Strike Price of Lower Strike Long Put – Net Premium Paid – Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Puts

Limited Risk

Maximum loss for the long butterfly spread is limited to the initial debit taken to enter the trade plus commissions.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Put OR Price of Underlying >= Strike Price of Higher Strike Long Put

Breakeven Point(s)

There are 2 break-even points for the butterfly spread position. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Strike Price of Higher Strike Long Put – Net Premium Paid

Lower Breakeven Point = Strike Price of Lower Strike Long Put + Net Premium Paid

Broken Wing (Skip Strike) Butterfly
A Broken Wing Butterfly(BWB) adds a directional bias to a standard butterfly.  A standard butterfly has long strikes that are equidistant from the short strikes (i.e. 5 points wide on each side).

 

A Broken Wing Butterfly(BWB) is different in that one of the long strikes will be further away than the opposite side (i.e. 5 points wide on one side, 7 points wide on the other). This transfers risk to the side with the long strike that is further away from the short strike.

Broken Wing Butterflies can be place on the put side or the call side.

This strategy is essentially a butterfly combined with a short call or put spread, depending on what the directional assumption.  By having the long strike farther away from the short strike on one side or the other, the trader is actually “embedding” a short call or put spread on that side of the trade.

It is preferred to enter broken wing butterflies in high IV environments. In most cases buy the strike that is furthest OTM.

For example, if a stock is trading for $98 and the intention is to buy an upside BWB, we would   choose strikes such as 100, 101, and 103. We would try to do this strategy for a credit to   mitigate all risk to the downside, but a small debit is acceptable as well.

In a standard BWB, the short strike of the additional vertical spread cancels out the long strike of one of the butterfly wings. This results in an asymmetrical butterfly, where one of the long legs skips at least one strike, depending on the trade bias.

Probability based traders generally prefer BWB’s when compared to other butterflies, because they allow the trader to reduce the cost basis with the credit of the embedded vertical spread. This is a great strategy for small account sizes, as they require minimal buying power and offer a decent ROC. Similar to other butterfly strategies, compelling research confirms managing winners between 25-50% to yield the best P&L and ROC.

The only adjustment that is executed for a BWB is when price moves away from the wider side of the trade.  This may allow the trader to execute vertical spread to eliminate risk from the “spread (or wide)” side of the trade.

Original BWB Trade                                         Adjustment                                    Resulting Trade

Long  1 – 158.00 Call                                                                                            Long 1 – 158.00 Call

Short 2 – 160.00 (ATM) Calls                                                                              Short 2 – 160.00 Calls

(skip 162 strike)                                         Buy  162.00  Strike                  Long 1 – 163.00 Call

Long  1 –  163.00 Call                                         Sell  163.00  Strike

Covered Straddle - Wide
A covered straddle (wide) is a variation of a standard butterfly except that the long strikes are much wider (5-25 points). This can also be thought of as a short straddle with defined risk. The covered straddle strategy is very similar to an iron butterfly except the long strikes are much wider and therefore the credit received, while larger, is not 50% of the width of the strikes.

 

To recap; a butterfly is a neutral, defined risk strategy where two short options at the same strike are accompanied by two long strikes on either side. The goal of this strategy is for the underlying to settle as close to the short strikes as possible at expiration.

Call and put covered straddles are usually priced similarly. On rare occasions, one price may differ from the other. In this case, we would buy the less expensive option. For this reason, it is always good to check the prices of both before selecting one.

Covered straddles are a viable strategy when volatility is very high.  This results in a higher entry cost that This reduces our max potential profit, but in turn, increases our probability of profit. Covered straddles (wide) are lower probability trades therefore it is preferred that the covered straddle is financed by selling  other high probability strategies.

Covered straddles are also optimally exited at 25% to 50% of the premium received at entry.  By exiting at 25% to 50% as in regular straddles the probability of profit increases and exiting with this criteria also eliminates the risk of a winning trade turning into a loser.

TRADE LEVEL 3 OPTION STRATEGIES

Jade Lizard
A jade lizard is an undefined risk strategy established by combining a short call spread with the sale of a naked put. The jade lizard makes maximum profit if the stock to expires between the short put and the short call of the call spread. As long as we collect a credit greater than the width of the call spread, a large upside move will never result in a loss.

 

 

While the jade lizard is definitely not bearish due to the naked put, it is also not bullish because of the short call spread. At tastytrade, we will use jade lizards during times of high implied volatility hoping for an inside move before the options expire. As long as this happens, it does not necessarily matter if the stock moves up or down, the strategy should be profitable.

Before putting on a jade lizard, we need to understand how the jade lizard takes advantage of volatility skew. Volatility skew refers to the pricing differential in equidistant OTM options. This skew creates an environment where the puts generally trade richer than the calls, due to the fact that the velocity of a crash is much higher than that of a rally. Not only does this work in our favor for the naked put, but it also makes buying our protective wing on our call spread cheaper than it would be for a put spread. Because both positions that make up a jade lizard take advantage of volatility skew, we look for a high IV rank to put this trade on. In addition to high IV rank, we will also make sure that the total credit taken in on the trade is greater than the width of the call spread. This gives us the opportunity to take advantage of a volatility crush without risk to the upside.

 

Long Call Ladder

The long call ladder is a limited profit, unlimited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term.

To setup the long call ladder, the options trader purchases an in-the-money call, sells an at-the-money call and sells another higher strike out-of-the-money call of the same underlying security and expiration date.

The long call ladder can also be thought of an extension to the bull call spread by selling another higher striking call. The purpose of shorting another call is to further finance the cost of establishing the spread position at the expense of being exposed to unlimited risk in the event that the underlying stock price rally explosively.

It is preferred that the long call ladder be entered for a credit (or zero).  This totally eliminates the downside risk in the trade. The long call ladder is a “go to”  strategy for earnings announcements where the trader has a strong bullish assumption.

Limited Profit Potential

Maximum gain for the long call ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the call options sold. At this price, while both the long call and the lower strike short call expire in the money, the long call is worth more than the short call.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Long Call – Net Premium Paid – Commissions Paid

Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls

Limited Downside Risk, Unlimited Risk to the Upside

Losses is limited to the initial debit taken if the stock price drops below the lower breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the upside beyond the upper breakeven point.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid

Loss = Price of Underlying – Upper Breakeven Price + Commissions Paid

Breakeven Point(s)

There are 2 break-even points for the long call ladder position. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid

Lower Breakeven Point = Strike Price of Long Call + Net Premium Paid

In Probability Based Trading by entering the trade for a credit or zero downside risk is eliminated.  In PBT this is a highly used strategy for earnings trades.

Long Put Ladder

The long put ladder is a limited profit, unlimited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term.

To setup the long put ladder, the options trader purchases an in-the-money, at-the-money or out-of-the-money put, sells an out -of-the-money put and sells another lower strike out-of-the-money put of the same underlying security and expiration date.

The long put ladder can also be thought of an extension to the bull put spread by selling another lower strike put. The purpose of shorting another put is to further finance the cost of establishing the spread position at the expense of being exposed to unlimited risk in the event that the underlying stock price falls materially below the lowest put sold.

It is preferred that the long put ladder be entered for a credit (or zero).  This totally eliminates the upside risk in the trade. The long put ladder is a “go to”  strategy for earnings announcements where the trader has a strong bearish assumption.

Limited Profit Potential

Maximum gain for the long put ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the put options sold. At this price, while both the long put and the next lower strike short put expire in the money, the farther out long put expires worthless.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Higher Strike Long Put (minus) – Strike Price of Short Call (plus or minus the Net Premium Paid(or received))  less Commissions Paid

Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Puts

Limited Upside Risk, Unlimited Risk to the Downside

Losses is limited to the initial debit (or credit) at trade entry if the stock price rises above the long put.  But large unlimited losses can be suffered should the stock price make a dramatic move to the downside beyond the lower breakeven point.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid

Loss = Price of Underlying – Upper Breakeven Price + Commissions Paid

Breakeven Point(s)

There are 2 break-even points for the long call ladder position. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid

Lower Breakeven Point = Strike Price of Long Call + Net Premium Paid

In Probability Based Trading by entering the trade for a credit or zero upside risk is eliminated.  In PBT this is a highly used strategy for earnings trades.

Ratio Spreads

A ratio spread is very similar to a vertical spread because it’s made up of a short option and a long option at different strike prices, in the same expiration cycle. However, a ratio spread consists of selling a greater quantity of options than those purchased (i.e. sell 2 options and buy 1 option). Ratio spreads consist of only puts or only calls, and the short options are always further OTM than the long.

As a strategy, ratio spreads look to take a slight directional assumption, while collecting more premium from the sale of additional naked puts or calls. This gives us little to no risk on one side of the spread.

Many ratio spread trades are initiated with a contrarian assumption of a price reversion. When the underlying price moves to areas of extremes, we will look to place trades that benefit from a move in the opposite direction. For example, if a stock has had a significant price increase, we may look to initiate a bearish ratio spread by selling 2 calls at the 84% OTM strike and buy 1 call at the 50% OTM strike. Therefore, establishing a bearish vertical call spread that has a 2:1 ratio.

In the above trade scenario buy putting on the call ratio spread trade for a credit there is no downside risk.  If the underlying falls belong the long call all of the options would expire worthless and you would keep the credit received at trade execution.

In the case of a put ratio spread where the trade is put on for a credit there would conversely be no risk to the upside.

Call Ratio Backspread

The call ratio backspread is a neutral strategy in options trading that involves buying a number of options and selling more options of the same underlying stock and expiration date at a different strike price. It is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

Call Ratio Spread

Using calls, a 2:1 call ratio spread can be implemented by buying a number of calls at a lower strike and selling twice the number of calls at a higher strike.

Limited Profit Potential

Maximum gain for the call ratio spread is limited and is made when the underlying stock price at expiration is at the strike price of the options sold. At this price, both the written calls expire worthless while the long call expires in the money.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Short Call – Strike Price of Long Call + Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Calls

Unlimited Upside Risk

Loss occurs when the stock price makes a strong move to the upside beyond the upper beakeven point. There is no limit to the maximum possible loss when implementing the call ratio spread strategy.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Strike Price of Short Calls + ((Strike Price of Short Call – Strike Price of Long Call + Net Premium Received) / Number of Uncovered Calls)

Loss = Price of Underlying – Strike Price of Short Calls – Max Profit + Commissions Paid

Put Ratio Backspread

The put ratio backspread is a neutral strategy in options trading that involves buying a number of options and selling more options of the same underlying stock and expiration date at a different strike price. It is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.

Put Ratio Spread

Using puts, a 2:1 call ratio spread can be implemented by buying a number of puts at a higher strike and selling twice the number of puts at a lower strike.

Limited Profit Potential

Maximum gain for the put ratio spread is limited and is made when the underlying stock price at expiration is at the strike price of the options sold. At this price, both the written puts expire worthless while the long put expires in the money.

The formula for calculating maximum profit is given below:

Max Profit = Strike Price of Short Put – Strike Price of Long Put + Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying = Strike Price of Short Puts

Unlimited Upside Risk

Loss occurs when the stock price makes a strong move to the downside beyond the upper breakeven point. There is no limit to the maximum possible loss when implementing the put ratio spread strategy.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying < Strike Price of Short Puts + ((Strike Price of Short Put – Strike Price of Long Put + Net Premium Received) / Number of Uncovered Puts)

Loss = Price of Underlying – Strike Price of Short Puts – Max Profit + Commissions Paid

Naked Short Call

Selling a naked short call (uncovered call) obligates the seller of the call to sell the underlying instrument at the specific stock price which was sold.  Due to the unlimited (undefined) risk of this strategy it is suited for the most advanced option traders.

The strategy has a maximum profit of the amount of premium collected.  In the PBT methodology the naked short call is typically executed at the one standard deviation or higher level.

Unlimited Upside Risk

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying >Strike Price of Underlying – Premium Received

Loss = Strike Price of Underlying – Price of Underlying + Commissions Paid

Breakeven Level

The breakeven level is the strike price sold plus the amount of premium received less commission paid.

For this strategy, time (theta) decay is our friend.  The trader wants the price of the option to approach zero.  Additionally, if implied volatility declines after entry this will benefit the trader.  In the PBT methodology we rarely sell naked short calls as an opening trade unless the IV Percentile > 50%.

Super Bear

The super bear strategy is the combination of a put debit spread and a short naked call.  The naked short call is typically sold at the 1 Standard Deviation strike (84% Probability OTM).  The premium from the sale of the short naked call is typically targeted to cover the cost of the put debit spread.

By receiving enough premium to cover the cost of purchasing the put debit spread the trader’s cash outlay is zero or a small credit.  However there is still a margin requirement (buying power reduction) for the naked call exposure.

Putting on the trade for zero or a small credit also serves to eliminate a potential loss on the trade if the underlying does not move down or even moves slightly up during the term of the trade as long as the price of the underlying stays below the short naked call.

The super bear is a obviously a bearish strategy as the name would imply but the potential profits are limited to the width of the put debit spread.  There is theoretically unlimited risk on the naked call side of the trade as a result of the short naked (uncovered) call.

As a result of the undefined risk of the short naked call this trade cannot be placed in an IRA account.  A “workaround” is to buy a call much farther up the option chain to define risk and allow the trade to be placed in an IRA account.

Short Strangle

A strangle is a strategy that consists of selling both a short call option and a short put option. The strategy is profitable if the price of the underlying stock stays above the strike price of the short put and below the strike price of the short call. The trade will lose money as the price of the underlying stock moves outside of the established range. A strangle is a great strategy to consider deploying when a stock has an IV Rank above 50.

While the strangle has a high probability of profit, it’s also an advanced type of trade that has undefined risk. This trade has greater risk than a vertical spread or an iron condor since the call and put options that are sold are naked options. Though, as a function of the trade’s undefined risk, it tends to deliver a higher return on capital than a defined risk trade.

Before selling a strangle, we need to consider the probabilities involved with the trade. We want the price of the underlying to stay between our short strikes, therefore it’s important to know the probability of our short strikes expiring OTM when placing the trade. If both of our short strikes expire OTM then we will realize max profit. In this situation we will keep the entire credit received when initially selling the strangle. As a benchmark we tend to set our strangle at the strikes that have a probability of expiring OTM of 84%.

The short strangle, also known as sell strangle, is a neutral strategy in options trading that involve the simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date.

The short strangle option strategy is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term. Short strangles are credit spreads as a net credit is taken to enter the trade.

Limited Profit

Maximum profit for the short strangle occurs when the underlying stock price on expiration date is trading between the strike prices of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.

The formula for calculating maximum profit is given below:

Max Profit = Net Premium Received – Commissions Paid

Max Profit Achieved When Price of Underlying is in between the Strike Price of the Short Call and the Strike Price of the Short Put

Unlimited Risk

Large losses for the short strangle can be experienced when the underlying stock price makes a strong move either upwards or downwards at expiration.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

Loss Occurs When Price of Underlying > Strike Price of Short Call + Net Premium Received OR Price of Underlying < Strike Price of Short Put – Net Premium Received

Loss = Price of Underlying – Strike Price of Short Call – Net Premium Received OR Strike Price of Short Put – Price of Underlying – Net Premium Received + Commissions Paid

Breakeven Point(s)

There are 2 break-even points for the short strangle position. The breakeven points can be calculated using the following formulae.

–Upper Breakeven Point = Strike Price of Short Call (plus) Net Premium Received

–Lower Breakeven Point = Strike Price of Short Put (minus) Net Premium Received

Short Straddle

The short straddle is a neutral options strategy that involve the simultaneous selling of a put and a call of the same underlying stock, strike price and expiration date. A short straddle is used when we believe that the stock will not have a significant move and we hope to take advantage of implied volatility contraction in the underlying.

Short straddles are limited profit, unlimited risk options trading strategies that are used when the options trader thinks that the underlying securities will experience little volatility in the near term.

Limited Profit

Maximum profit for the short straddle is achieved when the underlying stock price on expiration date is trading at the strike price of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.

The formula for calculating maximum profit is given below:

–Max Profit = Net Premium Received – Commissions Paid

–Max Profit Achieved When Price of Underlying = Strike Price of Short Call/Put

Unlimited Risk

Large losses for the short straddle can be incurred when the underlying stock price makes a strong move either upwards or downwards at expiration, causing the short call or the short put to expire deep in the money.

The formula for calculating loss is given below:

Maximum Loss = Unlimited

–Loss Occurs When Price of Underlying > Strike Price of Short Call + Net Premium Received OR Price of Underlying < Strike Price of Short Put – Net Premium Received

–Loss = Price of Underlying – Strike Price of Short Call – Net Premium Received OR Strike Price of Short Put – Price of Underlying – Net Premium Received + Commissions Paid

Breakeven Point(s)

There are 2 break-even points for the short straddle position. The breakeven points can be calculated using the following formulae.

Upper Breakeven Point = Strike Price of Short Call (plus)   Net Premium Received

–Lower Breakeven Point = Strike Price of Short Put (minus)   Net Premium Received