2X, 3X, 5X your money in the stock market in a single day using OTM Vertical Options
Hello all and welcome to Day 4.
Today we will be discussing one of my favorite option plays: OTM Verticals.
Yes, I know… A flashy title but thats the theme of todays subject. OTM Vertical Options are defined risk, defined rewards options plays where you can fully customize the payouts, duration, and even strikes. Here I will go over 3 different types of OTM Vertical Spreads, and in addition provide hypothetical examples using real-time data:
1:1 Verticals, 2:1 Verticals, and even a 4:1 Verticals! (Note: I haven’t seen anyone else use these terms when referring to Verticals, but I see it as very fitting given the payout structure)
1:1 Verticals:
Verticals will rarely fall into these categories perfectly, but we can adjust the strikes, strike widths, and duration to expiration to get as close to these ratios as possible. Heres a hypothetical example to a thought process that might go into purchasing the 1:1 verticals: Todays date is 6/30/2023. The Core PCE just came out better than anticipated, so I decide to place a bullish options trade: A 1:1 vertical. This is the closest to 1:1 I can find along the options chain:
Cost: $102
Max Profit: +$98
This is for 1DTE Vertical. Notice how the payout (Max Profit and Max Loss), are relatively close to the days close? This strategy would be employed purely for binary directional plays, great for earnings as well.
2:1 Verticals:
Here we are a little bit more ambitious. We are taking up a 2:1 OTM Vertical since we got confirmation from a few different (hypothetical) indicators: Heres the payout chart:
Cost: $67
Max Profit: +$133
If this Verticals short strike is ITM at expiration, then that would mean +198.50% Gain!
Here is the targets mapped out for todays $SPY Daily:
Do not be mistaken by the similarity to the last chart. Notice that as you go further and further OTM with verticals the payout starts to resemble that of a typical OTM vanilla call option. This happens because the short strike’s extrinsic value decreases as we ascend the options chain. Consequently, the proportion of extrinsic value in the long call versus the short call diminishes at a quicker rate. Here we have to jump nearly $2 for this vertical to be ITM. Note that the dark space between the green and red rectangles has a payout somewhere between Max Loss and Max Profit potentials. This will be addressed in more detail in an upcoming blog post.
Lastly;
4:1 Verticals:
Here, much like with the last two, I searched the options chain to see which vertical contracts closely resembled these payout structures. Here I found:
Max Loss: $40
Max Gain: $160
That means 400% profit at expiration if ITM!
Here is the payout:
And heres how it can be represented on the charts:
Note, that 1DTE options the day before would have easily been ITM for 4:1 Verticals, or maybe even 6:1 Verticals based on our analysis here. In order to be ITM in this case, the stock would have to go up around $3, and at expiration you would get a nice 400% profit on initial investment.
Let’s imagine a scenario similar to our previous example. The Core PCE outperforms expectations, technical indicators are signaling a bullish trend, and the news is positive. We observe the market’s movement from yesterday to today and predict a similar trajectory for Monday’s opening. In such a situation, this strategy would be a great fit. This is a defined risk strategy offering 4:1 odds. Statistically, as long as your predictions are correct more than 25% of the time, you’re Technically Profitable. So, even if you’re not right every time, this strategy can still lead to overall gains due to the inherent nature of its favorable odds distribution.
Nitty gritty on this will be the subject of another blog post.
Here is a graphical representation of them laid out side by side:
And here they are stacked:
Conclusion:
In conclusion, it’s crucial to remember that options trading, while potentially profitable, requires careful strategy and informed decision-making. Always prioritize trading responsibly and safely, keeping in mind that every investment carries inherent risks.
Please leave a comment, like and share so this can get more exposure! I would love to hear feedback, criticisms, questions etc. so please leave them below!
In the meantime happy trading!
Matt30
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