A earlier article discusses Tom King’s 1-1-2 choice technique.
He has different variations of that class, such because the 1-1-1 and the “long-term 1-1-2”.
The 1-1-1 and 1-1-2 are a part of the 1-1-x household of methods.
Contents
As a reminder, the “1-1” refers to 1 lengthy put and one brief put, forming an out-of-the-money put debit unfold.
The “2” is the 2 additional out of the cash bare brief places.
For instance:
A 1-1-1 is analogous however with just one bare put as an alternative of two (therefore extra conservative).
On October 11, 2024, Tom King shared with the world by way of YouTube his calendarized 1-1-2 variant of the technique – albeit not the entire nice particulars.
It’s the 1-1-2 with legs at totally different expiration as an alternative of all legs on the identical expiration (as within the conventional 1-1-2).
The calendarized 1-1-2 has the put debit unfold at 150 DTE (days to expiration) and two bare places at 30 DTEs.
The DTEs may be personalized, as can the variety of bare places (be it one or two).
As he mentioned in his YouTube video, you need to observe your danger tolerance and never observe his.
Right here is an instance of a calendarized 1-1-2 that I simply made up on SPX to get a generalized idea of the expiration danger graph.
Date: October 10, 2024
Value: SPX @ $5780
Promote two November 8, 2024, SPX 5150 put @ $13.85Buy one February 28, 2025, SPX 5775 put @ $177.65Sell one February 28, 2025, SPX 5675 put @ $150.80
Credit score: $85
Free Coated Name Course
Evaluating the 2 graphs, one doesn’t get as distinct of a “bear entice” within the calendarized model as within the conventional model.
Nonetheless, we nonetheless get a slanted entice the place the best revenue is achieved if SPX falls to 5150 on the expiration of the brief bare places.
The Greeks for this graph would typically be on the order of the next:
Delta: 8.30Theta: 193.90Vega: -365
This has a reasonably first rate theta/delta ratio of 23.
That is as a result of shorter time horizon of the bare places, which supplies it a bit extra theta (but in addition with a bit extra gamma).
I’m not saying that is his precise setup, as I used to be by no means a member of his service.
In any case, he sometimes trades the 1-1-2 on ES futures.
Nonetheless, he did point out that the choice construction may be utilized to different property.
Additionally, the important thing to the commerce is within the adjustment, which he won’t let you know on a public YouTube.
That is to know when and the right way to roll the bare places if the worth goes down in opposition to the commerce.
And even when he tells you, it nonetheless requires examine and apply to get the artwork of put-rolling proper.
The one clue he provides is that if the delta of the bare places double, then think about doing one thing.
On this specific instance, as a result of now we have obtained an total preliminary credit score, there isn’t any upside danger to the commerce given the configuration that it’s at the moment in.
No upside danger implies that if the worth of SPX stays above 5150 on the short-term expiration (that means the expiration of the brief bare places), the brief bare places will expire out of the cash, and we’ll hold the premium from the brief places.
As a result of the premium of the brief places utterly pays for the put debit unfold, the commerce can’t lose cash if SPX stays above 5150.
This will likely not proceed to be the case if the commerce has been adjusted, particularly if it has not been adjusted correctly.
Identical to the standard 1-1-2, that is nonetheless a adverse vega commerce.
It’s an choice for a premium promoting technique.
Tom King is a premium vendor.
The sale of the bare places is the place the earnings is being generated.
This creates the constructive theta by which earnings is generated as time passes, and the worth of the bare places decay.
The put debit spreads are the hedges.
They don’t seem to be full hedges as a result of there’s nonetheless an undefined draw back danger if the SPX value drops.
The adverse vega of the commerce implies that a volatility rise or spike won’t profit the commerce’s P&L (revenue and loss).
The calendarized model has much less adverse vega than the standard 1-1-2.
Due to this fact, the calendarized model has much less of a volatility danger.
By having shorter DTEs for the bare places, he can take the bare places off earlier, leaving the put debit unfold in place.
By layering these trades at numerous time intervals, he can get his portfolio to have a ratio of 5 put debit spreads for each two bare places.
This provides him an added draw back hedge and lesser bare put publicity.
The calendarized 1-1-2 is one other variant of Tom King’s household of 1-1-x methods.
The added draw back hedging the decrease volatility danger and the wording in his video means that the calendarized variant happened partially as a result of a few of the classes realized from the August 5, 2024 volatility spike by which cash was misplaced as a result of extreme quantities of bare places.
That is on no account the one technique that he trades.
It’s simply one other software within the toolbox.
We hope you loved this text on the calendarized 1-1-2 choice technique.
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Disclaimer: The data above is for academic functions solely and shouldn’t be handled as funding recommendation. The technique offered wouldn’t be appropriate for buyers who should not aware of trade traded choices. Any readers on this technique ought to do their very own analysis and search recommendation from a licensed monetary adviser.
