Definition

The logic behind the strategy comes from, the normal distribution curve which is what all options are priced by. For someone to make 10% a month on a non-directional strategy, usually something has to be sold; but when you sell something you are unprotected so you will have to purchase something else for protection. When we sell something we will be selling the peak of the normal distribution curve and when we buy something we will be purchasing a tail (an out-of-the-money option). In other words, we will be selling expensive options and buying cheap options for protection.

How it Works

1. Pick a stock that you would not mind owning.
2. Rather than outright purchasing the stock, we will sell an at-the-money put and purchase an OTM put.
3. If we are not assigned, we will allow the put spread to expire worthless.
4. A. If we are assigned and we have to purchase the stock, buy it on margin. B. If we are assigned at expiration and the long put is out of the money, our long put in the spread will expire worthless.
5. Sell a call in the same expiration month as the put that was purchased but at a higher strike than where the stock currently rests (a NTM call).
6. At expiration, if the stock rises above the short call strike, allow the stock to be called away and take your gains.
7. If the stock remains between the short call and long put strikes, either buy a new put and sell a new call or sell the stock and start the process over with a new stock.
8. Repeat