Hello again everyone! I hope this Sunday has you enjoying time with your family and your resting from another week. I don’t know if these next words are just for me or if someone else out there needs to hear them also, keep faith that Jesus will show up when you need him the most!
With that, let’s not waste any time tonight and jump right in to today’s topic, the 1-1-2 options strategy. This strategy has made it’s rounds through the Youtube trading community for some time now and seems to be gaining more and more traction. Who knows, the algorithm may just be targeting me with endless 1-1-2 options strategy content. Regardless, it’s out there and it’s my opinion that the way it’s being “marketed” is just down right dangerous.
In today’s post, I want to walk through a few critical items surrounding this advanced options trading strategy and what I might do instead. Full disclosure – I don’t currently trade the 1-1-2, nor do I have plans to at this time.
Post Agenda
- What is the 1-1-2 Options Strategy?
- How it’s being taught and why it could be dangerous.
- How I might trade it instead.
1-1-2 Options Strategy Basics
The strategy itself is fairly simple for anyone familiar with options trading. It’s the combination of a bear put spread and 2 short put spreads. Or as it’s conveniently named, 1 Long put closer to the money, 1 short put further from the money, and 2 more short puts even further from the money. Preferably, as far away as possible while maintaining a net credit for the trade. Doing this results in no risk to the upside but potentially unlimited downside risk on twice the underlying.
Now, if you’re aware of the risks or have an account that could handle an extreme downside move, then my “warnings” may not be for you. However, most of what I’m seeing is suggesting this trade be placed on the SPX or the e-mini futures /ES. In either one of those assets, a sharp downturn could spell disaster, fast!
Before I talk further about it’s teaching let me show you what the trade looks like from ThinkorSwim. This will add some valuable context for those not familiar with the strategy.
If you click to expand that image, you’ll quickly see why the trade is gaining such popularity. This particular trade has a 99.7% chance of returning a profit at expiration. Crazy right? It’s nearly a mathematical certainty that this trade returns a profit on the expiration date. However, I caution you to notice the pink line that falls sharply. Should /ES decline by a mere 5% you’ll be greeted with an uncomfortable loss. I don’t want to even think about the losses that may have come from a covid style decline.
In the next section, I’ll share with you the most astounding feature of this trade, that I just can’t believe is real.
Furu’s Teachings
Fake guru’s, or Furu’s, as I’ve heard them accurately named seem to love this strategy. They are quick to share their profit spreadsheets, their win rates, and that mathematical certainty I pointed to before. Funny enough, I don’t think I’ve seen a single 1-1-2 video showing a loss. I suppose it just doesn’t happen with a perfect strategy. (heavy sarcasm)
In any case, every video I’ve seen suggests trading this strategy on one of three products. The /ES, SPX, or for smaller accounts XSP. However, I don’t believe 99.9% of the Youtube community has a trading account capable of trading this strategy on any of these assets. Myself included.
Take this image below for example. This is the same trade from the image above, only from the order entry dialog. The buying power is that astounding feature I mentioned above that I just can’t believe is real.
Look at these metrics! Sure, I get it, the S&P isn’t going to zero so the near half a million max loss isn’t a reality. But a $10K, $20K, or even more surely is. Essentially, one trade could wipe out a life’s savings! Not cool!
Also, the buying power to access this trade is shockingly low at only $13K for the audience this trade is targeting. And for those trading this on Tastytrade, which most of the videos suggest, the buying power is even lower at only $7,051. Just insane for this level of risk.
All told, my honest complaint isn’t the 1-1-2 options strategy itself. It’s the cavalier attitude with which this trade is being spread across the web to unsuspecting options traders. It’s dangerous and should be criminal. Additionally, most of the traders online I see highlighting this strategy don’t just have one trade open. No, they have 2 or 3 of these going at any given time, and maybe more.
Please be careful folks.
Mini SPX Index (XSP)
Before I get to the final point of discussion I wanted to share the alternative they’re suggesting for those that don’t have the larger accounts. XSP, or the mini SPX index is a relatively new product for those wanting European style options without the account size to trade SPX. Generally speaking, I like the product and it’s gaining popularity. Still, I don’t personally feel comfortable trading the 1-1-2 options strategy here either. The risk is just too high.
How I Might Trade the 1-1-2 Options Strategy
With all that being said, I don’t know that I would just write the strategy off completely. The features it provides are incredible to say the least and could someday open the door for an opportunity.
As of today, I don’t have plans to implement the strategy but if I did I’d likely select a smaller ETF or an asset I could financially support. Maybe IWM, GLD, or TLT for example.
Currently TLT is trading below $100 per share with good options volume so that could be one to consider. Though, more research and testing would be my first step to avoid any risks that may not be obvious.
In any case, here is an image of the strategy using TLT for comparison.
The trade shown here still boasts a 95% probability of profit which is incredible at only $1700 in buying power. Executed properly and on a consistent enough basis I could see this being a long term winning strategy at a very efficient use of capital. It’s a far better option than what you’ll find about the strategy online, in my opinion.
Closing Thoughts
All considered, the strategy used on the products being shared is just reckless and those sharing the strategy make the options trading space worse for the rest of us. The advocates for this strategy all probably work for Tastytrade so they don’t care whether you make money or not, only that their order volume and commissions go up.
So with that, I humbly suggest you tread carefully if you decide to trade the 1-1-2 strategy and certainly don’t just listen to the furu’s online. They seem to have thrown caution to the wind at a time when I think caution is well warranted.
God bless,
Jeff
