Over the past few weeks, I’ve been testing out a new trading strategy, “ITM Ghetto Debit Spreads”. They involve two options, turning the trade into a Vertical Spread.
Similar to a Call Debit Spread, buying a Long Call position and selling a Short Call position to offset the cost of the Debit.
Except the difference is, you don’t purchase the two options at the same time.
Example:
You purchase Stock XYZ call option 50C at 9:30AM. You could also, sell the 51C at the same time for a vertical call debit spread. But let’s say you wait on selling the short.
Let’s say you purchase the 50C for 4.50 debit. Let’s also say the 51C is currently 3.60, which means you could’ve entered the vertical for 0.90.
Stock XYZ begins to rally & moves up over the next 15 minutes.
You then decide, you’d like to sell the short, taking your initial debit risk off the table & minimizing the risk at play.
Let’s say the 51C is now 3.90 & you decide to sell the short position. You’re now all in for a debit of 0.60 or $60. With the profit potential of 0.40 or $40.
$60 Risk for a $40 Upside potential – 40 / 60 ~~ 66% Return on Risk.
Compared to taking on the Spread initially your Risk/Reward would’ve been, 10/90 ~~ 11% ROR.
Ghetto Spreads are riskier than regular Debit Spreads, because if you’re timing isn’t correct, this situation could go the other way against you.
Understanding that before entering these types of trade are important to consider.
*Disclaimer, not financial advice, please understand your risk before entering these types of trades. Seek financial advice from a professional financial advisor, if further assistance is needed. The article listed above is intended to for educational purposes only.*
