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00:00:00 – 00:19:13
The video provides an in-depth explanation of the 112 option strategy, which is unique and less mainstream compared to strategies like the iron condor or credit spread. The 112 strategy involves one long put and three short puts, with the short puts placed far out of the money to increase the probability of profitability and finance a put debit spread. Despite its high win rate, often exceeding 95%, the strategy carries significant risk due to the additional short puts, which can result in rapid losses if the market moves against the position.
Key points include the importance of selecting the right strike prices and expiration dates (ideally around 45 days to expiration) to maximize the strategy's effectiveness. The video also discusses the capital-intensive nature of the strategy, providing an example with the IWM, which requires a substantial buying power, potentially limiting its accessibility for smaller accounts. The speaker advises constructing the put debit spread and short puts as a single order to mitigate risks associated with market movements.
The strategy's flexibility allows for profitability regardless of market direction, akin to a put ratio spread, and the video emphasizes thorough evaluation of various strike combinations to balance upfront credit and potential profit. In conclusion, the video highlights the importance of personal strategy preference and careful planning to achieve optimal results. Viewers are encouraged to engage with the content and further their understanding through additional resources like the options income blueprint.
00:00:00
In this part of the video, the presenter introduces the 112 option strategy, explaining that it is less mainstream compared to other strategies like the iron condor or credit spread. The name ‘112’ refers to the structure of the options involved: one long put that is out of the money, one short put that is further out of the money, and two additional short puts that are very far out of the money. This structure essentially involves three short puts and one long put.
The presenter explains the potential confusion and perceived danger of having multiple short puts, clarifying that two of these short puts are meant to finance a long put debit spread, which acts as a hedge. The strategy is compared to the put ratio spread, noting that the main difference is the additional two short puts that are placed further out of the money. The presenter continues to break down how premiums from selling the put options are used to purchase the put debit spread.
00:03:00
In this segment of the video, the speaker explains a strategy involving put options to achieve a high win rate. They discuss placing one put option far out of the money to collect premium, which then finances a put debit spread. The strategy involves selling two short puts instead of one to generate more premium, thus allowing the trader to buy a put spread with a net positive credit. The purpose of selling multiple short puts is to push them further out of the money, around 5 to 10 Deltas, which increases the probability of profitability since the market is less likely to hit these levels.
00:06:00
In this part of the video, the discussion focuses on the increased risk associated with the 112 strategy due to having two short puts instead of one. This strategy, while risky, offers a high win rate which can exceed 95% if the short puts are placed far out of the money. The pros include this high win rate and a short losing streak, which is psychologically beneficial for traders. A probability table is presented to highlight the low likelihood of consecutive losses, further emphasizing the reliability of the strategy. The emphasis is on understanding both the potential for high rewards and the inherent risks.
00:09:00
In this segment of the video, the speaker discusses the probabilities and characteristics of a trading strategy, noting that typically, one should expect no more than three consecutive losses, with a 95% probability construct usually resulting in two or fewer consecutive losses. This strategy is advantageous because it is omnidirectional, similar to a put ratio spread, allowing for profitability whether the market goes up or down. However, potential losses increase rapidly if the market falls past the breakeven point due to two short puts included in the strategy, which also makes it capital-intensive. The speaker uses the IWM as an example, noting a required buying power of about $3,442, which might be too high for smaller accounts. Additionally, constructing this strategy on lower-priced stocks can be challenging due to larger intervals between strike prices, as illustrated with Starbucks shares.
00:12:00
In this part of the video, the speaker explains a trading strategy involving selling short puts and buying put spreads. Using a simple example with an 80 strike put at approximately 9 Delta, they illustrate the potential credit and how to calculate the difference in strike prices. They highlight that achieving a credit greater than a debit can be challenging in some cases and might require adjusting the number or strike prices of the short puts.
They emphasize the importance of selecting options close to 45 days to expiration (DTE) for an edge in trading. The speaker outlines steps for the strategy: choosing puts around 5 to 10 Deltas, constructing the put spread, calculating the credit received, and determining the appropriate strike prices for the long put, which should be between 25 to 45 Deltas. The decision aligns the strategy with an acceptable risk and potential profit zone.
00:15:00
In this segment, the discussion revolves around different strategies for structuring put spreads to achieve desired profit zones. The video explains that selecting put spread strikes near a 25 Delta can yield more credit but with a lower max profit zone. The speaker demonstrates trying various combinations of put debit spreads and short puts to find optimal constructs, highlighting examples with specific strikes and their respective credits. They explain that adjusting the strike prices allows for balancing upfront credit received and potential maximum profit. For instance, a two-point wide debit spread provides less upfront credit but increases potential profit if the market drops. Additionally, further out-of-the-money spreads are discussed, showing that they can be profitable but require careful consideration. The importance of personal strategy preference, whether slightly bullish or bearish, is emphasized in choosing the right spread construct.
00:18:00
In this segment of the video, the speaker emphasizes the importance of submitting a put debit spread as a single order ticket to avoid unnecessary risk. Splitting the strategy, such as selling the short put first and then buying the debit spread later, can lead to potential losses if the market moves unfavorably. The speaker concludes by encouraging viewers to share their thoughts in the comments, like the video, watch the next recommended video, and obtain a free copy of the options income blueprint.