Overview:
The 112 strategy is the core strategy in our portfolio. It is a medium to long term strategy utilizing trades anywhere from 60 to 120 (we prefer 120) days until expiration with a ~99% probability of profit. Overall risk is relatively low with trades profiting on unlimited market upside with significant protection to the downside. We prefer to make this trade using /ES futures options but it can also be made on other futures as well as SPX or even individual stocks. We primarily focus on futures for the leverage they provide with low buying power reduction.
Explanation of trade:
The 112 trade consists of two parts
- Purchasing a single put debit spread (long leg around 25 delta)
- Selling two far out of the money naked puts (around 5 delta)
Risk profile for 112 trade shown below:
We choose this strategy as our core strategy due to its high win rate along with its ability to perform well in multiple market conditions.
Pros:
-High win rate (99%+ probability of profit)
-Bull market protection (profitable with unlimited market upside)
-Bear market protection (large trap with significant opportunity for increased profits to the downside)
Cons:
-Will underperform in heavy bull market conditions
-Trades take relatively long to realize full gains
-exposed to unexpected rapid declines in the market
Let’s start by reviewing some of the pros which make this our go-to trade for most scenarios. At a 99%+ probability of profit, this trade has an extremely high chance to yield income. This high rate of probability comes mainly from the low delta put options. A 5 delta put 120 days out on ES is generally over a 20% drop from the current price. A 20% drop in the S&P is not THAT uncommon on a long term basis however it is rare for the event to occur within a short period of time. The covid crash was an example of a time when this occurrence took place with a drop of over 35% in around a month. While these large unexpected moves don’t happen all the time, they can pose a significant risk.
With unlimited upside protection, this trade does well in a bull market. Generally when the naked put positions reach near maximum gain, they can be closed while keeping the put debit spread open for downside protection.
In a down market, this trade benefits from a large trap created by the put debit spread. Having the trade expire anywhere between your naked puts and your put debit spread results in maximum gain usually around 3 to 4 times what you’d profit to the upside.
As highlighted above, in a raging bull market, this strategy will generally underperform traditional buy and hold strategies. Another downside is that the long hold duration of the trade exposes you to more risk. Unlike other strategies, we prefer to keep the naked short positions open until almost full potential gain whereas you’d normally want to close out trades at 50% profit.
NOTE: This is not financial advice. All content on this website is for entertainment purposes only. All followers are responsible for their own actions when investing. Talk to a licensed professional before making financial decisions.