C) with 0dtes, I recommend a take profit and no SL. Itās really easy to have your SL hit. Itās also really easy to have your TO hit if itās close. So use that to your advantage. Just size down. Have your max risk you are willing to lose equal to total the cost of your option
Quick lesson: Iāll assume you understand how calls and puts work. Iāll also use round numbers to make the math easy for you regards.
If $NVDA is at $900 and I think it will close somewhere around there by the end of the day, I can do four basic things. Thereās so many other strategies that could be used, but hereās the basics:
Buy a $950 put and sell a $925 put. (A)
Sell a $850 put and buy a $875 put. (B)
Buy an $850 call and sell an $875 call. (C)
Sell an $925 call and buy an $950 call. (D)
All four of these are called vertical spreads because the options are the same expiration date, same type (call or put), and differ only in the strike price (one above the other, hence the name vertical). Each one has a $25 difference in strike price.
Iāll start with (C) because itās probably the easiest for crayon eaters to understand.
Generally you want to buy low and sell high if youāre long a position. Or, conversely sell high and buy low if youāre short.
If I buy the $850 call that means Iām buying the stock at $850. Obviously thatās a good deal because the stock is already at $900 and I think it will stay there. Since the stock is at $900 and Iām buying it for $850, the intrinsic value of the $850 call is $50. But obviously someone is going to want me to pay them a premium for me getting that kind of a $50 off deal, and that premium gets added on based on a lot of things: how long until the option expires, the volatility of $NVDA, etc. That extra premium is what makes the $850 call cost more than $50.
Okay.
So to offset that cost, Iām going to sell someone my stock that I bought at $850. I will do this by selling them an $875 call. Just like the $850, the intrinsic value is $25 because whoever buys it from me can buy my stock that I sell them for $875 and sell it at $900. But theyāll have to pay me a premium as well, so Iāll get more than the $25 to just flip the stock. Since Iām selling this option, I will be getting paid. I wonāt get paid as much as what I had to spend on the $850 call, but I will at least have something to offset my cost.
This difference in what I paid and what I get paid is not going to be very much. But, if Iām willing to risk the $25 (that I could potentially lose if $NVDA drops to $850 and my call option becomes worthless), then that means itās like free cash. Iām buying the stock for $850, selling it for $875 and only have to pay (hypothetically) $24.50 for the deal.
There is a certain type of person to whom this will appeal. Risking $2,500 to make $50 probably doesnāt sound appealing. But if Iām x% certain that itās going to close around $900, then I donāt really think about it as ārisking $2,500ā so much as ārisking 100-x% that an event y will happen at time z.ā
Either way, this is a debit spread because Iām paying $24.50 for the deal hoping it will be worth $25 by the close.
On the other hand, with a strategy like (A) Iām buying the higher put and selling the lower, and just collecting the premium difference between the two prices (maybe itās $0.35). If $NVDA explodes to the upside those puts I bought are going to lose value much faster than the ones I sold, so I could end up having to buy them back for the max difference of $25. But if it doesnāt, then I just get to keep the $0.35 (x100) for selling the spread. This is why this is called a credit spread rather than a debit spread because Iām not paying the $2500 up front (although your broker would almost certainly still hold it in the liability that it did blow up and you lost everything).
The other two strategies are similar, and which one you deploy depends on the implied volatility pricing that goes into calls vs. puts, which ones are the best deal, and the probability that the stock might actually move up or down away from $900.
This is an income strategy because itās not purely dependent on the direction that $NVDA goes in but will be profitable either way; itās very popular with stocks that are lower volatility because theyāre more predictable and donāt move as much, but also you get less premium from it too.
Obviously it can go very wrong very fast if youāre risking something like $25,000 to make $500 on a consistent basis, so risk management is key.
Several good strategies for this usually begin about 45 days out and then close the position 20 days away from expiry.
It can also be deployed on a daily basis with SPY 0dte options which lose value very quickly later in the day. Usually you would want to close the position out after a p% gain rather than hold them to the end of the day, but if you donāt get bothered by some of those sharp late day moves then you can hold it for the full premium, but statistically your risk goes up when you do.
TLDR: There is no TLDR. If you canāt read and understand this in its entirety you belong here and donāt deserve the wisdom Iām giving you.