Ranking Option Strategies Based On Risk | Options crash Course 2024

in this crash course I want to tackle all things risk as it relates to the world of options and in doing so I want to work our way from the less risky option strategies slowly but surely all the way up to the more risky option strategies and if you guys hang with me all the way to the very end then I'm going to walk you through step by step a truly risk-free strategy that's right no downside only upside [Music] hey Jim SCH here with you guys and welcome to the options risk crash course in this

crash course I want to tackle all things risk as it relates to the world of options but before we get into all that I want to take a couple of minutes and dispel a commonly quoted myth that I see getting regurgitated over and over again in the options world every time I hear it I just shake my head every time I read it it just makes my blood boil the myth goes a little something like this as soon as the word options is introduced into any trading or investing conversation the immediate connection is Ultra highrisk

Mega Max leverage like ride or die red or black let's go you trade options oh man you must really love swinging for the fences with wild volatility and crazy fluctuations all day every day something like that well that myth exists because you can certainly use options for that purpose if you want to if you want to load up go all in on one trade not a good idea by the way you can certainly do that like that exists that option is available to you and pay attention to the financial news I mean you will consistently

hear about option traders who hit it big overnight or lost every everything in the blink of an eye in the options world but the truth is that characterization of options is wrong because it is incomplete at a minimum and potentially totally inaccurate depending on the context and the circumstances just as easily as using options to you know push up your size into number of contracts or notional value Way Beyond what you ever can or should control you can use options for the opposite purpose you can use options to reduce the overall risk in your portfolio

that's right using options for Less risk not more Risk by doing this now the outcomes become more reliable the ride becomes smoother the fluctuations become less than they would have been otherwise case in point the protective put an option strategy that I'm going to show you does exactly that most investors have a portfolio of long stocks they're playing the market to the upside that makes a lot of sense since historically the market has returned on average around 10% per year to a long only portfolio so it makes a lot of sense to carry a long-term

bullish bias absolutely but if you do this what are you most exposed to right what is the fly in the oint so to speak it's the big outlier move to the downside the Black Swan if you will so we're talking about the internet bubble from the early 2000s the great financial crisis from 2008 even the covid crash from early 2020 the Swift violent moves that can wipe out years and years of appreciation in your portfolio these can be really tough to stomach and this is where an option strategy like a protective put could be something

to consider to essentially act as insurance against one of those big violent moves to the downside you buy some long puts to add to your portfolio of long stocks so most likely in a market index like spy or QQQ if the market does drop through your strike during the time you hold those long puts they will gain value and hedge some of the losses you have to absorb on your long stock if the market doesn't drop through your strike during the time you hold those long puts they will expire worthless and you'll be out the

premium that you paid on them now that is painting with a very broad brush and we certainly skipped over some important details but the basic idea is this a strategy like a protective put acts like an insurance policy against the extreme outlier move against you but at the end of the day is a protective put a good strategy or a bad strategy for you you to consider in your portfolio well if we look at this research piece that the team did back in October of 2020 it doesn't look too amazing studying the spy from 2005

to 2019 on average over time buying the 16 Delta puts for protection your average p&l was minus $57 per trade it only protected you 7% of the time and your biggest winner was only a couple thousand so in the end it ended up being a net negative to profitability so it doesn't look like the protective put is a good strategy to consider implementing in your portfolio on a regular basis but that's not even my point I just wanted to serve up a very simple counter example to the notion that options are ultra high risk Mega

Max volatility all day every day you can just as easy easily use options to better control your downside and better control your overall risk which is exactly what we're going to see in episode two when we take a look at the covered call so I'll see you guys there so Jim Schultz back with you guys for episode two inside of the options risk crash course we just got done with episode one where we dispelled this notion of options being Ultra high-risk Mega Max leverage all day every day because we showed a very simple example with

the prote prove put of a way to cut the risk in your portfolio now the results with the protective put based on the tasty research they're a little problematic so we probably want to find another option to maybe do the exact same thing which brings us to the covered call not only is a covered call a great bridge for those of you that are familiar with stock but very very unfamiliar with options not only is the cover call a great bridge to connect the world of stock with the world of options but as we're going

to see in just a few minutes the covered call is without argument without dispute a less risky position than long stock itself that's right crusty stale old long stock that nobody ever thinks about being risky like I'm long spy or a long QQQ or a long Dia or whatever nobody ever thinks about that as being risky a covered call as we're going to see is less risky than that even so for example you could take a stock like any stock it could be Chipotle it could be Tesla it could be Microsoft right let's take Microsoft

if I'm looking at a bullish position in Microsoft and I'm trying to compare should I buy the stock or should I put on a covered call position here is what we're going to see in the next few seconds every single time every single time the long stock only position is the risk rier of the two the covered call is the less risky of the two again we're just talking about a covered call and we're just talking about long stock in a stock like Microsoft let me show you what I mean so for the purposes of

this illustration I'm going to ignore the dividend that Microsoft pays just to make the numbers a bit easier to work with since you own the shares in both strategies you'd be receiving those dividends either way so they just cancel each other out anyway from a comparison standpoint but if you buy 100 shares of Microsoft at $350 per share then your risk return profile is pretty simple and straightforward you make money if Microsoft rises above 350 you lose money if Microsoft Falls below 350 and you break even if Microsoft stays right at $350 per share very

simple very easy to follow okay now take a covered call where you buy the same 100 shares at 350 bucks a share but you also add a short call that expires in 45 days up at the $370 strike let's say you collect $3 for it here the risk return is similar but different in some important ways you still make money if Microsoft rises above $350 per share now those gains are capped at 370 your short call strike so you're giving up potential returns beyond that point a negative for sure but look at what else happens

if Microsoft Falls below $350 per share then you're going to lose on your long shares just like you would with a strictly long share position but you're also going to be able to keep that $3 that you sold the call for if that call stays out of the money which it will if Microsoft is moving down so in other words you've Capp your potential gains that's the gotcha but the Gimme as it relates to risk is you now have $3 that you can use to buffer against any drops in the stock similarly if Microsoft goes

nowhere and your long stock position doesn't do anything you're also going to be able to keep that $3 in this instance too so you will have turned an otherwise Break Even event into a profitable outcome so hopefully now you can clearly see I mean maybe the covered call is a good strategy maybe it's a bad strategy maybe it's something you should consider maybe it's something you should completely discard that's a separate discussion for another time that's not my main point right here because of the credit that you collect on entry and the way and the

fact that that credit can serve as a buffer against stock drops a covered call is by definition a less risky position than pure straight long stock so in other words what have you done using options you have reduced your port portfolio risk not ultra high risk not Mega Max leverage you have actually taken your portfolio risk down now similar to a covered call another strategy that you could consider would be a naked put so here for every 100 shares that you would normally purchase you instead sell one out of the money or maybe at the

money naked foot well very much like the covered call was lower risk the naked put will also be lower risk than the long stock itself here's how so let's take Amazon selling for $140 per share you are considering buying 100 shares in a straightforward long stock position or selling a 130 strike put for a premium of $33.50 if we break down the different possible outcomes you will see how the short put comes out on top in terms of risk reduction if Amazon rises above 140 then both positions are going to do well the long stock

is going to profit from the stock appreciation and the short putut is going to expire worthless so you would keep the premium that you collected on Entry easy stuff but a rising stock isn't the scenario that we're interested in suppose instead that Amazon Falls to 135 if you own the shares then you're going to have to absorb that loss dollar for dollar so you'd be down $5 per share but interestingly with your short put strike at 130 a drop to 135 actually doesn't hurt the short put at all it's still out of the money so

you would keep the $33.50 in premium that you sold it for similarly let's assume that Amazon drops even further all the way down to 120 what happens now well much like the drop to 135 the long stock position has to take on the full weight weight of that move which is a $20 per share drop but the 130 put if Amazon is at 120 that short putut is only $10 in the money so that means it only has $10 worth of intrinsic value take out the 350 in premium that you sold it for to begin

with and you're looking at a loss of only $6.50 a far cry from the $20 loss that a long stockholder would have to endure so again my hope is from working through that simple illustration that you can see the potential that is available with options to reduce your risk as a short put is literally less risky than long stock NOW to be fair of course there is a downside with this strategy every gimme there's a gotcha just like we saw with the covered call your potential gains will be capped with a short put whereas with

a long stock your potential gains are uncapped because there is no limit there is no ceiling to how high High stocks can rise so it's important that you understand that but remember our Focus here is not on profitability our Focus here is not really on generating returns that's a separate discussion for another time possibly in altogether different crash course what I wanted to focus on here was risk I wanted to focus on the options risk that exists in that product and what do we see we see less risk the covered call and or a short

putut not to mention our discussion we're just focusing on holding the options to expiration so any temporary changes in p&l and any fluctuations in the options price in terms of extrinsic value that's a little bit beyond the scope of what I wanted to do here I wanted to keep things simple I wanted to keep things straightforward to just illustrate this idea that options and high risk are automatically connected is completely false when they are matched for size short puts and covered calls are less risky than long stock for the 11th time in the last 9

and a half minutes and interestingly something else that's somewhat related but maybe a little bit off the reservation options give you buying power advantages and flexibility that stocks simply cannot deliver as our good friend Tony Batista shows us here in his trade talk from 2021 where he's talking about syn synthetic stock positions in your portfolio let's take a look synthetic stock synthetic stock in spy let's look at adding a long call to our strategy think about that for a moment you're going to add a long call to the short 50 Delta put remember you sell

a put with 50 Deltas sell a put is 50 long Deltas you buy a call at the same strike that's 50 long Deltas that's 100 long Deltas short put long call same thing synthetic stock we can look at adding that five Delta put look what we're trying to do here we're trying to keep the buying power the same on the top slide you have short 50 Delta put and a long 50 Delta call in a margin account it uses $99,000 the debit or credit received is just about a dollar in credit very very small but

we have a 100 shares of stock remember if you're just going to buy the stock you're going to need the $38,000 here you only need $9,000 but we're still in a margin account let's look at the IRA account just to refresh your memory the short 50 Delta put and the long 50 Delta call in an IRA is going to use that $339,000 it's going to be the same debit or credit received because there's no difference in an IRA account or a margin account the Delta is going to be a 100 now look at the last

part of this Slide the short 50 Delta put so far all the same the long 50 Delta call all the same and now we're just adding one component that long five Delta put look at our buying power it goes from $39,000 to $88,000 we give up a very small debit or credit to this instead of having a dollar in credit it actually cost us 45 cents to do it's a debit but look what happens our Delta is basically the same at 95 Deltas so we've taken this account that could not make this trade and all

of a sudden we've ramped it up to act just like a margin account and synthetic long stock so like I said in the very beginning you got that YOLO trade or those Diamond hands don't look to buy fractional shares what could you buy 10 20 shares of spy or any stock that you wanted to do if you use this simple strategy you'll be able to control 100 shares of stock that's some pretty incredible stuff that Tony just went through and that is what is available to you using a product like options but I want to

focus on that too much I want to stay somewhat focused on the task at hand which is risk which brings me to our very next segment inside of this crash course where we're going to tackle to find risk strategies I'll see you there hey Jim Schultz back with you guys for episode number three of the options risk crash course and up to this point we have now completely dismantled the notion that risk in the world of options automatically means Ultra highrisk and mega Max leverage we saw this with covered calls and we saw this with

short puts you can actually use the options world to reduce your portfolio risk well right right now if this is all completely new to you I'm willing to bet that you're starting to get a little excited about the potential that is available inside of the world of options because of the unique nature of this product whether you want to use them as a substitute for stock or as a complement to stock the customization that is available to you in the options Market is second to none it is truly unmatched and this is is where our

next risk category comes into play defined risk strategies you see with defined risk strategies not only are you going to be able to dial in your risk down to the dollar given the nature of your risk being known and defined on order entry but you'll now be able to choose whatever directional bias in the market you want to choose bullish bearish or neutral if you want to play the market higher you can easily sell a short put spread if you want to play the market lower you can easily buy a put diagonal spread and if

you want to play the market neutral you can very easily set up and execute an iron Condor so not only are you able to position your portfolio however you want to but with defined risk strategies you are able to plug into the positive Theta available with short options and the higher probabilities of Prof that only exists with this type of product so now at this point I hope you can see maybe the 14th or 15th time now that the automatic connection between super ultra high risk and options is just not real it's just a total

falsehood in terms of that always being the case we saw it with covered calls we saw it with short puts and now we're seeing seeing it with an entire category of strategies Define risk strategies where that is just not true but one more thing about defined risk before we jump into the next arguably more exciting category of undefined risk you might naturally Be Wondering at this point wait a minute Jim you're already done with Define risk you've barely even scratched the surface I mean I'm excited I'm ready to go where are the resources that I

can lean on to know more and learn more about all the different defined risk strategies well for the purposes of this crash course I really wanted to stay focused I wanted to stay on track two things that don't come naturally to me on the task at hand which was options risk and specifically this whole kind of myth situation and this idea of options always being categorized as high-risk that is just not true for all the reasons that we've already talked about but but for those of you that are just starting out we already have a

host of resources available to you on the YouTube channel I've already done six seven eight different crash courses that you can check out right now the first one that I would check out is the full 2hour long 2023 crash course that we just did last year that takes you from nothing to arguably self-sufficient Trader in two hours straight through where I cover all lot of ground but also secondly check out the strategy management crash course that is also on the YouTube channel that works through some of these strategies like vertical spreads and iron Condors in

a lot more detail but as it relates to risk specifically without getting into the details of a vertical spread or an under Condor or any of the strategy specifics that exist inside of the structure of all the defined risk strategies you might be wondering Jim how do I know if I'm controlling my risk effectively when it comes to defined risk strategies well let's take a look with defined risk strategies or really any strategies you never want to put yourself in a position where you can't manage the trade the way it was intended to be managed

and the number one way to make sure that doesn't happen is by staying small on order entry now of course you're probably wondering well how small is small well that largely depends on your account size generally starting with Define risk strategies we aim to be between 1 to 3% of net liquidating value per position and that will work for anyone in the let's say 20,000 to $100,000 account size range if you have more than 100,000 in your account so 200 250 500 a million then you'll likely be able to shrink your trades down even smaller

below 1% of your account at times and and if you have less than 20,000 in your account then you'll likely have to increase the upper end of this range probably hitting five 6 7% or even higher at times with some of your positions so at the end of the day it's all really relative when it comes to position sizing but hopefully this gives you some concrete parameters to kind of lean on as reference points the main thing that we want to avoid is having one trade account for you know 15 or 20 or 30 or

40% of our account the probabilities are going to work out over time but man when you push all your chips in the middle so heavily on one outcome that is just a recipe for disaster so that is how options risk relates to defined risk strategy specifically as it relates to position sizing which I would argue is the most important risk metric because that is what you can control Ro on order entry what I want to do now though is let's transition into everybody's favorite undefined risk strategies I'll see you there hey Jim schz back with

you guys for episode number four or the fourth segment inside of this options risk crash course by now you're probably getting pretty clear on the concept of the customization that is available with options and how you can begin to build out these kind of uniquely customized portfolios to fit whatever your objectives might be from a risk standpoint even from a return standpoint there's so many different ways that you can go in the world of options well now what I want to do is I want to move onto the other side of the fence when it

comes to risk and exposure we just covered defined risk strategies let's now turn our attention to undefined risk strategies and as soon as you heard that your initial reaction was probably like yep here it is he waited until we were 30 minutes in and now here comes the bait and switch here comes the old ROP Adobe we're going maximum swings Ultra Max leverage well again to be clear yes you can do that right if you want to do that you can do that I do not think it's a good idea I do not think you

should do that but you can do that that is the flexibility and the versatility that's that's available in side of the options Market what I want to focus on is another side to the undefined risk strategy category that is maybe more appealing to all of my risk averse Brethren that might be watching the show and what we're going to see might very well surprise you now just to make sure that we're all on the same page undefined risk strategies or naked strategies these are option strategies where there is no safety net built in the strategy

if there is a big move in the market you are going to be exposed to the entirety of that move you're not going to have your losses capped at a certain level like you would with a defined risk strategy like a vertical spread or an iron Condor now that might sound like an incredibly high-risk Endeavor and in a sense it is because on a caseby casee basis when you take a naked option strategy and compare it to a defined risk options strategy you're not going to have the capped losses on the undefined risk strategy that

you do have on the defined risk strategy so from a maximum loss standpoint yes it can look a lot riskier and by definition it is but here's what might surprise you two things actually well first we've already seen that there are plenty of times when undefined risk strategies are less risky than stock itself here's what I mean recall how we just looked at a naked short put relative to straight long stock back in episode number three and the naked short put came out on top in terms of risk control well a naked short putut is

by definition an undefined risk position you are essentially exposed to unlimited potential losses on the downside yes technically the stock is bounded by zero but if you're selling puts in apple or IBM or iwm those stocks aren't going to zero anytime soon and what I think is interesting is that most people holding long stock in Apple or IBM or iwm they don't ever think about their stock going to zero theoretically it's certainly could and they probably know that but practically that's just not on people's radar s and I think this is the correct way to

look at it most people think about a 5% or 10% or 20% drop as being pretty much the worst case scenario and I think that is completely fair but for whatever reason and this gets back to the myth that we kind of kicked off this course with the same perspective of zero not being a practical outcome just isn't applied to an undefined risk option strategy even one like a naked short put even though Long stock is just as much undefined risk as a naked short put is in fact it's riskier than a naked short put

for all the reasons that we unpacked back in episode number three so again from a purely risk centered perspective undefined risk strategies can be less risky than long stock but here's another thing that is almost certainly going to surprise you you undefined risk strategies can even be less risky than defined risk strategies here's what I mean so this is something that the research team at Tasty has looked at a number of ways but recently back in an options Jive from early 2023 what the research team was able to show was that on paper short strangles

could have an unlimited loss so it makes sense that you earn higher returns with short strangles relative to iron Condors but by using a similar amount of capital in both strategies the portfolio with iron Condors actually generated higher volatility over the long term than the portfolio with short strangles that's right more risk and more volatility with defined risk than you saw with undefined risk I mean that is a crazy crazy result is it not I mean that's very very very surprising stuff so don't ever just take it as given that undefined risk strategies are automatically

riskier than stock we've already seen that's not true but also don't take it as a given that undefined risk strategies are necessarily riskier than defined risk strategies when you equate for size and buying power and look within the context of an overall portfolio as we just saw from that study that just might not be the case so again the potential that is available with options from a risk standpoint alone the customization the Strategic elements the ability to build the exact portfolio that you want it is unmatched yes you can use options to gamble yes you

can use options to go ride or die on this one trade in Tesla or this one trade in Chipotle or this one trade in McDonald's you can certainly do that just like you can do it with any other asset and you can bet your bottom biscuit that your portfolio results they're going to swing around like a fence off its hinges you can be assured of that but if you want to take a long-term approach to Building Wealth controlling your risk and customizing your portfolio in a way that you simply cannot do with stock alone you

can do that too all right so now we have completely and utterly dismantled the myth that options automatically high risk I think that's fair we've also now talked about covered calls and short puts and defined risk strategies and undefined risk strategies again go look at those other option crash courses that I referenced they will be a great supplement to what we talked about here but now it is time it is time for me to deliver on my promise that I would show you how to set up a totally risk-free strategy so let's do it Jim

Schultz back with you guys for the final installment the final little segment of this options risk crash course we've done it all to this point we've done Define risk we've done undefined risk we've done covered calls we've done naked puts we've been mythbusting we've done it all it's now time to move to the final step right we talked about you know myths related to risk we talked about defined risk we talked about undefined risk we talked about you know risk mitigation can we actually get to a stage of risk elimination is that possible in short

yes and just as I promised I would do I'm going to show you exactly how to set up a riskless options trade now to be clear this is going to be a riskless trade but you haven't discovered the Holy Grail here on YouTube on the internet on the tasty live Network I'm not about to give you the pin number to the ATM of just endless stack of cash that's not going to happen there are a few qualifiers that we have to unpack around this riskless options position again it's almost like every gimme there's a Goa

even the riskless gimmies there's going to be at least one gacha attached to those guys but still what I'm going to show you how to do is take an existing position and given a certain set of circumstances that exist in the marketplace and turn it into a risk free position the strategy to do this is called a free butterfly now to fully understand how to build a free butterfly we have to first familiarize ourselves with two other strategies the regular standard butterfly and the ratio spread so let's hop into the tasty trade platform together and

I'll show you how these guys shake out all right so here we are we are inside of the tasty trade platform we are inside of the portfolio that I use for from Theory to practice Shameless plug Monday through Friday at 2:00 Eastern time well let's take a look at Disney and let's use Disney for the purposes of our example kind of working through butterfly ratio spread and then a free butterfly now the ivy rank of 15 this is probably not the greatest example for selling premium like a butterfly at ratio spread but it'll work for

the illustration and for our purposes here today with a free butterfly Okay so let's go into the trade page and let's open up the January cycle with 30 days to go and let's start with a very standard straightforward plain vanilla butterfly spread in Disney let's say that we were going to put on a butterfly spread slightly to the downside in Disney now I'm not going to work through all the inner workings of butterflies and ratios that's not the purpose of what we're doing here but we do need to make sure that we are up to

speed on some of the basics so if I were to buy a butterfly using put options on the right hand side of the screen I'm going to buy you know these are your puts these are your calls I'm going to buy a 93 put let's say I'm going to sell the 91 put and I'm going to buy the 89 put now of course I need to go back in and double up on my 91 put to create a butterfly so you can clearly see that this is a standard $2 wide butterfly it's a 25 C

debit to put this strategy on and if we move on over to the curve view we can get a visual look at what this looks like from a p&l standpoint if I click on my curve View and I click on my analysis Tab and I move this kind of right hand this kind of rightand menu over because I don't really need that right now you can see that this is what I'll even zoom in a little bit here and we move over this is what a standard butterfly let me Center it even a little bit

better this is what a standard butterfly is going to look like right you want to pin the short strike you're profitable around the short strike but you essentially have risk on both sides of the market in terms of this is where you would lose the debit that you pay so this is a very standard butterfly this is how standard butterfli is set up and this is what they look like on the p&l graph okay so let's go back to the table view now and let's look at this butterfly a little bit more closely if you

take a look at the different strikes that you have you have one long strike you have two short strikes actually I should do it over here you have one long strike you have two short strikes you have one long strike again this is a very standard plain vanilla Betty Crocker butterfly something we use all the time if you wanted to instead do a ratio spread in Disney a ratio spread is nothing more than a butterfly where the last Wing is missing so last in this case is going to be the further out of the money

butterfly so or the further out of the money Wing I should say so that would mean I keep my 93 strike in place I keep my 91 strikes in place and then I delete this bottom Wing this 89 strike leaving me with a classic 1 by two ratio spread so let me go ahead and right click on this delete the leg 93 991 1 by two ratio spread and look at what has happened to the debit sledit now I'm on a 45 net credit this is the key to understanding not only butterfly spreads and racial

spreads but how we are going to eventually migrate to this free butterfly debit paid on a butterfly credit received on a ratio spread but look even more closely at the difference between these two strategies all I've done is I've eliminated this 89 strike we'll look at the cost of the 89 strike it's around you know the bid is 71 cents the offer is 74 cents so it's somewhere around I don't know 72 or 73 cents well look at what happens if I bring the butterfly back into the mix look at what happens to my credit/debit

I buy my 89 strike now I'm at a 26 Cent debit if I eliminate that strike I'm back to a 46 47 Cent credit the difference between those two numbers is equal to the cost of the missing Wing so to speak and that should make perfect sense because that's what we're doing we're buying that extra Wing to keep the butterfly intact and not have the undefined risk of a ratio spread now again I don't want to work through the undefine risk and the defined risk of butterflies and ratios I want to kind of stay on

point in terms of getting us to the free butterfly but can you see the difference between the two because this difference this 72 or 73 cents that is the difference between again the debit paid on the butterfly now it's 28 cents the markets are open so these prices are obviously moving but if I delete that now now I'm at a 45 credit that difference is this cost that you see right here all right so right now to create this butterfly spread I need to pay again about a 27 Cent debit okay so this is clearly

not free we saw the risk on the curve viw but what if I start with a ratio spread with a 46 Cent credit what if I start with this strategy and then I let the market do its thing I let time go by I let the market dynamics kind of move around and what is likely to happen if the market stays where it is or Disney moves higher what is likely to happen to the cost of this 89 put the missing wing on the butterfly this cost is going to go down now how do I

know it's going to go down how am I certain that it's going to go down if the market rallies or if the market even stays right where it is it's going to go down more quickly if the market rallies it'll go down a lot more slowly if the market stays where it is but it will go down I know this is the case because all of these options that you see on this side of the market on the put side they're all out of the money right the 93 91 89 even the 86 83 whatever

these are all out of the money so the prices are 100% extrinsic value well I know that as time goes by there's downward pressure on extrinsic value I also know that if the market rallies and Disney prints 94 95 96 97 then these strikes are going to be further out of the money well what do we know about further out of the money strikes they have less extrinsic value than the closer to the money strikes you can even see this for yourself right now if you look at like an 84 strike at 20 cents relative

to like an 89 strike at 73 cents if the market rallies this 89 strike it's going to be headed in the direction ction of the 884 strike the 85 strike the 83 strike where the cost of the option is going to decrease and if you think about it this should make perfect sense as the only difference between a standard butterfly and a ratio spread is that last Wing that missing Wing so to speak when you're looking at a ratio spread having come from a butterfly so the only difference between the credit on a ratio spread

and the debit on a butter fly is going to be the cost of that missing Wing okay so now think about the fact that you're collecting a credit on your ratio you would have to pay a debit to complete the ratio and turn it into a butterfly what if there came a point you can't do it now because if you buy that missing Wing it's going to turn it into a debit but what if at some point in the future the market dynamics changed such that you could actually buy that missing wing for less than

the credit that you collect right now on the ratio spread what would happen if you were able to do that that's right you will have created a free butterfly just like this okay let's push this idea one step further remember if I put this ratio spread on I have 47 cents in my back pocket right I have a 47 Cent credit to work with if I buy the butterfly today if I complete the butterfly and pay you know 7374 cents for this 89 strike this is going to be a net debit but what if I

put the racial spread on and then I wait I give the market a chance to move maybe the market starts to Rally maybe Disney Catch catches a little bit of a bid this cost let's say it drops down to 55 cents 50 cents 45 cents 40 cents let's say a week and a half from now or two weeks from now I look up at this 89 strike and it's not 7374 it's actually 40 I could then go in I could buy this 89 strike for 40 cents and what will have happened remember I have 48

Now 50 cents in my back pocket I have 50 cents in my back pocket I pay 40 cents for this 89 strike to complete my butterfly I will have a butterfly on where I didn't pay a 25 C debit because again we did this in p over time I will have actually collected a 10 a 10cent credit so I change my net debit to net credit and look at the p&l graph for this this my friends is a free butterfly there is no scenario where you lose money you only make a little on the outside

of the butterfly or you make a lot around the short strike now again how did this happen well I had to wait right I had to take on the risk of the ratio spread I had to assume the undefined risk of the ratio spread so again this can't be free from the start sadly that doesn't exist but if I utilize a ratio spread very common strategy that we use all the time there will be many many many times when if the market accommodates you and moves in the direction that you want which in this case

with the put ratio spread would be Disney actually going higher then you're going to see the cost on on that last put which in this case was the 89 put you're going to see that dry up you're going to see that decrease and then if you want to you're going to have the opportunity to Butterfly this thing off and put yourself in a situation where you cannot lose money you can't lose money you're only going to make you your worst case scenario is you keep your 10-cent credit that's your worst case scenario because again remember

we put the ratios spr down for 50 cents and then we went back in 2 weeks later 2 and 1 Half Weeks Later whatever ever and we bought the missing Wing not for 77 cents but for 40s so the net credit/debit is a 10cent credit and you have a free butterfly pretty wild is it not I mean is that not crazy that you can take an existing position again sadly we can't do this on order entry because if we could do that then we wouldn't have to worry about anything ever but if you can take

an existing position and turn it into a riskless position that is a very interesting and unique little tool to have in your toolbox a riskless strategy with no downside and only potential upside if that doesn't put the final nail in the coffin that options are automatically highrisk I don't know what will and guys just like that we have finished the options risk crash course I really hope that this brought some value to you in some way whether you watched the whole thing through or you just bounced around to the different chapters that made the most

sense to you however you accessed this content and I'm so thankful I'm so humbled that so many of you took time out of your day your week your schedule to hang with us and spend time with us and so thank you because it's only because of you that we can do what we do so thank you thank you thank you if I can ever help you in any way personally please reach out to me my email is J Schultz tasty.com or we can connect on Twitter I AMJ Schultz F3 I would love to hear from

you guys on there as well so I guess this means I will see you guys next time