TLJ Backspread: Known as the "Tarzan Loves Jane" trade due to the risk graph looking like a combination of swinging vines. It combines the best of strikes, months to expiration, and ratios of buys to sells while exploiting volatility. This type of trade is very sensitive to changes in implied volatility so is best opened in a low volatility environment. An ideal scenario is one in which volatility is at multi-year lows when the position is entered, and then volatility makes a rapid increase. On the other side, if volatility declines below the level where the trade originated, losses are likely to occur.
The results from this scan are just the beginning and the scan is designed as more of a cheat sheet to creating TLJ trades. The scan combines ratios of calls and puts to create combinations that offer a very low dollar risk. As volatility and the Greeks of the overall position change, the position will change. Use the risk graphs and Greek information that OptionGear provides to adjust your TLJ Backspread to either lock in profits or adjust your Greeks to make for more profit potential or to work towards the direction that the stock is moving in. A key to making this trade successful is your adjustments as the underlying stock moves around.
An ideal situation or scenario for these types of trades are as follows:
1. A minimum of 2 year lows of Implied Volatility
2. A stock that has a history of large moves
3. Volatility skews (ideal, but not required)
4. Liquidity in the options (which will make it easier to get into the trade and make adjustments)
Important: The investor should use caution in using this type of spread combination without understanding how changes in the market's Implied Volatility affects the trade. An appreciation of the Greeks is crucial both in understanding and executing this type of trade. Building this trade properly but applying it in the wrong market environment without understanding of how to compensate for the changes in the option Greeks can lead an investor to assume that there is no risk in the trade. Caution should be exercised in applying any complex derivative hedging strategy without an advanced level of option trading education.
ALWAYS MAKE SURE YOU UNDERSTAND HOW A TRADE WORKS AND WHICH PARTS CAUSE THE RISK AND WHICH PARTS PROVIDE THE PROTECTION. UNDERSTANDING VOLATILITY AND WHAT THE GREEKS TELL YOU ARE VITAL TO TRADING USING THIS STYLE."
As Example;
in oct stock @ 81.xx
sell 3 jan 60 puts
buy 5 apr 62.5 puts
sell 3 jan 120 calls
buy 5 apr 120 puts
