Twisted Sister Option Strategy: Should You Trade It?
The twisted sister options strategy is a reverse of the Jade Lizard strategy, which is a unique approach for neutral to bullish scenarios. The Twisted Sister strategy is suitable for neutral to bearish scenarios, where you expect the stock price to stay the same or go down.
In this article, we will explain the Twisted Sister option strategy, how it works, why you should trade it, and how to trade it effectively. We will also cover this unique strategy's benefits, risks, and best practices.
What is the Twisted Sister Option Strategy?
The Twisted Sister option strategy is a neutral to bearish, undefined risk strategy. This trade has no downside risk when placed correctly but unlimited upside risk due to the short naked call.
The strategy consists of three components:
Selling an out-of-the-money (OTM) call option
Selling an OTM put spread
Buying an OTM put option
It is important to collect more credit than the width of the put credit spread to ensure there is no downside risk. For example, if you sell a 5-wide put credit spread, you must collect at least $5 in premium to ensure there is no downside risk.
The strategy is called Twisted Sister because it is a reverse Jade Lizard strategy, which involves selling an OTM put option and an OTM call credit spread.
Twisted Sister Options Strategy on tastytrade
Here is how to construct a Twisted Sister trade:
Choose an underlying stock that you have a neutral to bearish outlook on
Choose an expiration date for the options
Choose three strike prices: one for the call option, one for the short put option, and one for the long put option
Sell an OTM call option at the highest strike price
Sell an OTM put spread by selling a put option at the middle strike price and buying a put option at the lowest strike price
Make sure that the net credit you receive from selling the call option and the put spread is more than the width of the put spread
For example, if you sell a $50 call option for $2 and sell a $40/$38 put spread for $1, your net credit is $3.5, which is more than the width of the put spread ($2)
Why Trade the Twisted Sister Option Strategy?
The Twisted Sister option strategy has several advantages that make it appealing for options traders. Here are some of them:
Flexibility: The strategy can profit from a wide range of stock price movements if they are not too extreme to the upside. You can profit from a sideways or downward movement in the stock price, as well as from a moderate upward movement. You can also adjust your strike prices to suit your market outlook and risk tolerance.
Income generation: The strategy allows you to collect premium upfront by selling options. This can help you generate income in a low-interest environment or enhance your returns on your existing portfolio.
How to Trade the Twisted Sister Option Strategy Effectively?
While the Twisted Sister option strategy has many benefits, it also has some risks and challenges that you need to be aware of and manage effectively. Here are some key considerations for implementing this strategy:
Risk assessment: The main risk of this strategy is that the stock price rises significantly above your short call strike price, exposing you to unlimited upside risk. To mitigate this risk, you need to have a plan for exit or adjustment if the stock price moves against you. You can use stop-loss orders, trailing stops, or other risk management tools to protect your position.
Suitable market conditions: The best time to use this strategy is when you expect high volatility in the stock price but not too much upside risk. This can happen when there is uncertainty or anticipation in the market, such as before earnings announcements, product launches, or major events. High volatility can increase the premium you receive from selling options, making the strategy more profitable.
Selection of strike prices and expiration dates: The strike prices and expiration dates of your options affect your risk-reward profile and your probability of success. Generally, you want to choose strike prices that are far enough from the current stock price to give you enough room for error but not too far that you receive too little premium. You also want to choose expiration dates that are close enough to capture the volatility in the stock price but not too close that you have too little time for the trade to work out. You can use tools such as delta, theta, and implied volatility to help you select the optimal strike prices and expiration dates for your trade.
Monitoring and adjustments: The Twisted Sister option strategy requires active management and monitoring, as the stock price can change quickly and affect your position. You need to keep track of the stock price, the option prices, and the implied volatility and be ready to adjust your position if needed. You can use tools such as profit/loss graphs, breakeven points, and greeks to help you analyze your position and make informed decisions.
The Twisted Sister Options Strategy | Bottom Line
The Twisted Sister option strategy is a unique and versatile approach that can help options traders confidently navigate the market. It is a reverse of the Jade Lizard strategy, which is suitable for neutral to bullish scenarios. The Twisted Sister strategy is suitable for neutral to bearish scenarios, where you expect the stock price to stay the same or go down.
The strategy consists of selling an OTM call option and an OTM put credit spread. The strategy generates a net credit and no downside risk when placed correctly. To ensure there is no downside risk, you must collect more credit than the width of the put credit spread.
However, the main risk is that the stock price rises significantly above your short call strike price, exposing you to unlimited upside risk. To mitigate this risk, you need to have a plan for exit or adjustment if the stock price moves against you.
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