Premium Leverage Spread: A New Options Trading Strategy

Overview

The Premium Leverage Spread is an advanced options trading strategy designed to maximize premium collection and profit potential. This strategy combines selling a deep in-the-money (ITM) put, purchasing long-dated calls, and writing weekly/monthly covered calls on those long positions. The goal is to create a highly leveraged yet hedged position with multiple income streams.

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How It Works

1. Step 1: Sell a Long-Dated ITM Put
   • Choose a stock or ETF with high liquidity and sell a deep ITM put option with the longest expiration available.
   • Collect a significant premium upfront due to the deep ITM position.
2. Step 2: Purchase Long-Dated Calls
   • Use the premium from the short put to buy three long-dated calls, ideally with the same expiration as the sold put. These calls provide directional exposure.
3. Step 3: Write Covered Calls
   • Sell covered calls against the three long call positions. Choose a strike price slightly above the long calls’ strike to collect additional premium while keeping room for upside profit.

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Pros

1. Premium Generation
   • Significant premium is collected from the short put, which can reduce the cost of the long calls and add a buffer to the position.
2. Leveraged Upside
   • The three long calls provide substantial upside potential if the underlying asset appreciates.
3. Income Stream
   • Selling covered calls generates consistent income, potentially offsetting time decay on the long calls.
4. Flexibility
   • The strategy can be adjusted as the market moves by rolling the short put or covered calls for additional credits.

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Cons

1. High Margin Requirement
   • The deep ITM short put requires substantial margin, limiting accessibility for smaller accounts.
2. Directional Risk
   • A significant decline in the underlying’s price could lead to losses on both the short put and long calls.
3. Theta Decay
   • The long calls are subject to time decay, and the premium collected from the covered calls may not fully offset it.
4. Complexity
   • This strategy requires active management and an understanding of rolling positions and adjusting strikes.

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When to Use the Premium Leverage Spread

• Bullish Outlook: This strategy thrives in moderately bullish markets where the underlying is expected to appreciate but not excessively.
• Volatility Advantage: Works best when implied volatility is high, increasing premium collection on both the short put and covered calls.