Risk Twist Spreads

Question 1

Why do we use the RTS instead of a Put Ratio Back Spread?

Answer 1

The skew negatively impacts a ratio back spread dramatically. This means you will pay too much money to place positions.

Question 2

What are some special characteristics of the RTS?

Answer 2

1. limits upfront cost
2. value increases when markets tank
3. there is a vertical spread embedded in order to offset the IV Skew
4. You only need to place RTS 4 times a year with quarterly expiration cycles

Question 3

What is the best way to minimize risk if the markets short out big time?

Answer 3

a Risk Twist Spread

Question 4

When is the best time to place a RTS?

Answer 4

anytime is good, however, it is most optimal in times of low volatility ( VIX < 16)

Question 5

When placing a RTS, look for options with a _______ expiration

Answer 5

130 - 90 day

Question 6

What is one unit of the RTS trade? (ratio)

Answer 6

Sell 1 : Buy 3 : Sell 1

Question 7

When building the RTS, what class of option do you pick for bullish and bearish positions?

Answer 7

If bearish, always trade puts.

if bullish, always trade calls.

Question 8

Can you set up a bearish RTS and a bullish RTS (not simultaneously)?

Answer 8

yes

Question 9

Break down how you calculate the Buying Power Reduction of an RTS that you’re placing?

Answer 9

on the first part (the Vertical Spread), Spread Width - Credit Received
on the second part (the Buy 2 : Sell 1 Custom order), it’s just the Debit
to get the total buying power reduction, add those two parts together

Question 10

When will the RTS usually kick in?

Answer 10

5 - 7% down or more

Question 11

What is the exit criteria of the RTS?

Answer 11

Close 4 weeks prior to expiration, regardless of win, lose, or draw

Question 12

What delta values are you looking for when placing an RTS?

Answer 12

Sell 1 put with -.18 to -.22 delta
Buy 3 puts with -.22 to -.27 delta
Sell 1 put with -.35 to -.40 delta