Liz and Jny #BackRatios
I highly recommend watching this video from yesterday’s TastyTrade show. I have been missing a lot of TT in the last few months, but by total accident I caught this segment yesterday. This isn’t your normal backratio. They have found a design that mimics stock 1:1 for a fraction of the expense/risk. It works for both long and short setups. I have immersed myself in this design for the last 24 hours using all different kinds of ratios to get close to a 1:1 delta. Put this in the bucket of long call diagonals and fuzzies for stock replacement, but still with income potential.
The key to their design is you sell 1 ATM call or put, then look to buy 2 ITM where the intrinsic will cover the credit received on the sell. If you do a 1×2 you are free to sell “1” in a front month for income, and be risk defined. Use your risk graph to massage the ratio until you get the delta you seek. 3×5, 6×8, 3×4, you get it.
Here is an example from me this morning: I had on 2 naked puts for MA for tomorrow expiration, risk was over $38,000 on 200 shares of stock. I wanted to redesign a trade with $5,000 at risk. I closed those puts for 60% profit this morning and opened an October 8×6 back ratio. I sold 6 190 calls and bought 8 185 calls, the resulting delta is a little less that owning 200 shares of stock. In addition I sold 2 (8-6=2 for risk defined income) May 25 195 calls for .76. My total risk in this trade is $4821 and it will move almost 1:1 with stock.