Options Strategy: Swing Trading With Variable Weighting

Using options to focus more on either uptrend or downtrend is an effective method for augmenting the swing itself. The strategy assumes that you have an opinion about the prevailing direction of movement in the underlying, and that momentum confirms your opinion. So as a starting point, you can coordinate a weighting decision by checking some of the best momentum oscillators like RSI or MACD.

There are numerous methods for weighting one side or the other. On the bottom of the swing, bullish weighting can include:

  • Increasing the number of long calls opened (for example, opening two long calls will create twice the profit of upward movement in the underlying when in the money; and of course, three calls will triple the effect).
  • Increasing the number of short puts opened (this does the same on the downside, and weighting long puts accelerates out-of-the-money profits as long as the underlying price continues to rise).
  • Combining long calls with short puts, creating a synthetic long stock position (the synthetic is low-cost or no-cost because the long premium is paid for by the short premium, and yet the overall position reflects price movement in the underlying point for point in the money).
  • Increasing the number of long puts opened (as with the bullish side, this bearish approach creates ITM profits from the puts at a rate greater than movement in the underlying).
  • Increasing the number of short calls opened (this is a higher-risk strategy in the event that the underlying price rises; but if your indicators say the price will move south, this approach increases current income and cushions the risk, leading to profitable “buy to close” orders).
  • Combining long puts with short calls, creating a synthetic short stock position (the risk is greater due to the short call, but also consider making this into a collar by holding shares of the underlying).

All positions including uncovered short options also require collateral to be kept on deposit. Before embarking on any positions with uncovered options, check the collateral rules with the free download at CBOE Margin Manual

The weighting concept can be expanded and made more conservative by also holding stock when short calls are employed. However, even a covered call can be effectively weighted with the use of a ratio write. Even better, a variable ratio write expands income without adding significantly to risk, since higher strikes can be closed, covered or rolled before the position move in the money. Another form of weighting involves backspreads, in which “cover” of short positions is accomplished by buying a larger number of higher-strike calls (or lower-strike puts).

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