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00:00:00 – 00:19:13
The video introduces the 112 option strategy, a lesser-known trading method compared to traditional strategies like iron condors and credit spreads. It involves one long put option, one short put option further out of the money, and two additional short put options even further out of the money. This configuration aims to balance risk by selling puts to gather premium, which is then used to fund a put debit spread as a hedge. The strategy is praised for its high win rate, often above 95%, due to the low probability of the market hitting the far out-of-the-money short puts. However, it carries inherent risks, including potential rapid losses if the market declines and a requirement for substantial capital, making it less accessible for smaller accounts.
The strategy is omnidirectional and aims for minimal losses, typically capping losses at two to three sequential trades. Implementation involves choosing an expiration close to 45 days to expiry (DTE), selling short puts around 5 to 10 Delta strikes, and constructing a put spread with the long put between 25 to 45 Deltas. Examples include high-priced stocks like Nike and Starbucks, highlighting the challenge with lower-priced stocks due to wide intervals between strikes.
Effective execution involves submitting the order as a single ticket to avoid unfavorable market movements. The speaker concludes by inviting engagement from viewers and promoting additional resources.
00:00:00
In this part of the video, the speaker introduces the 112 option strategy, distinguishing it from more mainstream strategies like iron condor and credit spread. The 112 strategy involves:
1. One long put option that is out of the money (below the current market price).
2. One short put option that is further out of the money than the long put.
3. Two additional short put options that are very far out of the money.
The speaker explains that although the presence of three short puts might seem risky, the strategy essentially involves selling put options to gather premium, which is then used to purchase a put debit spread that acts as a hedge. This strategy is closely related to the put ratio spread, which traditionally has two short puts closer to the money, and offers an alternative configuration by spreading out the short put options.
00:03:00
In this part of the video, the speaker discusses the strategy of using put options to achieve a high win rate. Specifically, they explain the mechanics behind creating a put ratio spread, which involves selling two short puts that are far out of the money to finance a put debit spread. By moving these short puts to a very low Delta, such as 5 to 10, the strategy aims to increase the probability of profit since the likelihood of the market reaching these levels is low. The speaker also highlights that selling two short puts generates more premium to ensure the overall trade remains profitable even when the puts are pushed further out of the money.
00:06:00
In this part of the video, the speaker discusses the increased risk that comes with the 112 strategy as it involves having two short puts instead of one, effectively doubling the risk. The strategy is highlighted as a high win-rate premium selling strategy. The 112 strategy’s key advantage is its very high win rate, often above 95%, which necessitates pushing the two short puts further out of the money. This high win rate leads to short losing streaks, which is beneficial for traders who prefer consistency. The speaker also introduces a probability table to show the likelihood of consecutive losses within 100 trades, emphasizing that having four losses in a row is extremely improbable, indicating the strategy’s reliability.
00:09:00
In this segment, the speaker discusses a trading strategy designed to achieve minimal losses, highlighting that losses are generally capped at three in a row, with two losses being most common. The strategy is largely profitable, claiming a 95% success rate, and is omnidirectional, meaning it can make money regardless of whether the market goes up or down, given certain conditions. However, there are cons to this strategy. One significant downside is the potential for rapid losses if the market declines, due to having two short puts. Additionally, this strategy is capital-intensive and less feasible for smaller accounts, as it requires substantial buying power. For example, using it on IWM requires roughly $3,442. The strategy is also tricky to implement with lower-priced stocks due to wide intervals between strike prices, as illustrated with the example of Starbucks.
00:12:00
In this segment of the video, the speaker provides a detailed example of constructing a put spread strategy. They start by explaining how to sell two short puts at around 5 to 10 Deltas, noting that this would potentially involve selling at the 80 strike for about 50 cents each, leading to a $1 total credit. The strategy involves buying a put spread, such as the 90 and 85 strikes, and calculating the difference, which in this case results in a debit rather than a credit. The speaker discusses the feasibility of this strategy with different stocks like Nike and Starbucks, pointing out the challenges due to wide intervals.
The speaker then outlines the steps to trade this strategy effectively:
1. **Choose the closest to the 45 DTE expiration**: Studies suggest this DTE provides an edge as the realized move is typically less than the expected move.
2. **Select two short puts at around 5 to 10 Deltas**: There is a wide range of strikes to choose from.
3. **Construct the put spread**: Assess the credit received and calculate how wide of a put spread you can purchase. The long put should be between 25 to 45 Deltas, balancing between max profit potential and upfront credit received.
These steps are meant to guide viewers on how to apply the strategy optimally, involving careful selection of strikes and assessing risk and credit.
00:15:00
In this segment of the video, the focus is on constructing and adjusting different put debit spreads to optimize the desired outcome in trading strategies. The speaker explains trying out various put spread strikes to find a suitable structure, providing examples with specific numbers. For instance, using short puts at 170 to finance a debit spread and shifting strikes to explore different credit and profit scenarios. They discuss narrower spreads offering lower upfront credit but potentially higher maximum profit if the market moves favorably. Conversely, wider spreads, positioned further out of the money, offer smaller initial credits but higher profit zones and greater protection if the market declines. The key is to tinker with the strikes to determine what aligns best with one’s market outlook, whether slightly bullish or bearish.
00:18:00
In this part of the video, the presenter emphasizes the importance of submitting the order for a put debit spread as a single order ticket rather than splitting it up. They explain the risks associated with splitting the strategy, such as market movements potentially leading to less favorable positions. The presenter concludes by inviting viewers to share their thoughts on the strategy in the comments, encourages them to like the video, and promotes additional content and a free resource available through a link on the screen.