Mindset.
This is a stock-replacement strategy, that's all. That's why you'd only want to use it on stocks that are trending up.
And if you've set it up right, the BE should be right at spot.
The deltas get you close, but you really need to make sure the Extrinsic you're buying in the 2 long Calls is offset by the Extrinsic you sell in the short Call.
Yes, that's a good point. But I don't average down. Either I was right on the direction or I wasn't, in which case I'll take the loss and move on. "Cut your losers and let your winners run," that sort of thing. If it's not your style that's cool too. Take care....at least from the mindset of an investor or swing trader where we view draw downs as opportunity to add to our positions not as losses.
If you wish to leverage using options, your resulting delta should be > 1!
I leverage using DITM Calls and DITM Puts, obtaining deltas between 1.5 and slightly under 2. You can enter for debit or credit (which ever you prefer) by picking the strikes carefully. -- You can do this for either long or short with leverage. You will need to consider the increased risk of your position when leveraging this way. -- Some instruments are not candidates for this, such as short leveraged UVIX position.
It above not clear, think of creating a synthetic position (Call and Put at the same strike), then begin to slide the Call and Put away from center until your delta provides the leverage you want.
Correct! Best used with European instruments like SPX & VIX options to have no assignment risk. Note: if normal equity options, even using ATM strikes on entry can become DITM (with assignment risk) if your timeframe is longer. -- If you have reliable idea of where the security will trade while in the position, you can tweak your entry strike to allow a longer time with some safety from assignment (reduce probability of assignment-by insuring strike will remain within x% of spot during your position).I think you will sooner or later run into early assignment issues if you leverage or hedge with DITM calls or puts on equities, right? Not to mention the effective trading spreads might be higher than ATM.