# In-Out Spread

**Call In-Out Spread****:**

- Long 1 slightly-
**ITM (in the money)**call. - Short 1 slightly-
**OTM (out of the money)**call.

**Put In-Out Spread****:**

- Long 1 slightly-ITM put.
- Short 1 slightly-OTM put.

<*Risk chart of a call in-out spread retrieved from tastytrade*.>

An in-out spread is a directional options strategy with a very narrow distance between **strikes **and that is on both sides of the money. Alternatively, this same strategy is sometimes called an “**ATM** debit spread”.

This strategy does not yield much profit for the **debit **risked in individual cases, but could add up meaningfully in large numbers over time.

A call in-out spread would buy a call 1 or 2 strikes under the money and then sell a call at a higher strike (1 or 2 strikes above the money). For example, if the money (the location of the underlying price is) at 50, then a call in-out spread would buy at the 48 or 49 strike, and then sell a call at the 51 or 52 strike.

A put in-out spread, on the other hand, would buy a put 1 or 2 strikes above the money and then sell a put at a lower strike (1 or 2 strikes below the money). For example, if the money (the location of the underlying price) is at 50, then a put in-out spread would buy at the 52 or 51 strike, and then sell a put at the 49 or 48 strike.

## Intermediate: Practical Application

The key differentiator of an in-out spread (as a special type of vertical strategy) is that it has a narrow **width of the option spread** and wraps itself around the money (where the underlying price is). The main idea of this strategy is to have a directional stake without immediately paying meaningful penalties in **theta** or **implied volatility** **crush**. This is effectively having some leverage protected by a logical stop loss, and leverage which has profit results mostly undistracted by changes in IV (implied volatility). Essentially, an in-out spread attempts to gain leveraged directional exposure with options while immediately cheating the normally adverse effects of time decay or IV crush.

Therefore, if bullish but only for the conviction of a small directional move, such as because the **Call Wall** had just been lifted up, then one can open a call in-out spread and then take profits after a short move. Or, if bearish and only expecting a small move, such as if the **Volatility Trigger™** has been breached to the downside and the **Put Wall** has stepped down, then a put in-out spread could be used. Either way, these work well with small profit targets where the high-accuracy nature of this strategy is being used.

In-out spreads can be used to scalp [ultra short term] momentum by leveraging probability-of-touch (the relatively higher chance of price action eventually colliding with a level than expiring beyond there), and insulating against **theta** (time decay) and **vega** (implied volatility related) damage.

Another approach with in-out spreads is to play large binary events during the cash session. There is enough noise and wide chop after one of these that easy profit targets can often be hit either way. The key for that consistency however is to keep profit targets easy and accuracy high.

## Advanced: Strategy and Synthetics

There’s a good case for taking quick profits on these, and taking advantage of the high accuracy of being able to hit those profit targets with a high win rate. With this approach, the amount risked would be greater than the amount earned, but the win rate is high and the total debit is low since the width of the spread is small, which means that the max** risk is tightly defined**.

**Synthetically**, at the same strikes, long puts can be swapped for long calls and short puts can be swapped for short calls; one might do this if for whatever reason the Greeks or reward/risk is slightly more favorable.

**ATM (at the money)**: An option is at the money when the strike price of an option is the same as the underlying price of the stock.

**Call Wall**: The Call Wall is the strike with the largest net call gamma. This shows us what the top of the probable trading range is (the upper bound).

**debit**: In an option strategy, there is a debit paid from long options or debit spreads. This is the premium paid for the opportunity to hold the position. The debit also functions as the max loss of a long option position. The counterparty receives a credit as time decay income (theta) until the option expires but takes on risks which can lead to losses and be significant if from an open-ended position.

**debit spread**: In an option strategy, a debit spread is one that has a net debit (upfront cost) paid for long options. This means that there is an upfront cost which must be outperformed by expiration, however there are rights instead of obligations (which keeps the option holder in control). Unless a debit spread is deep in-the-money, it would be very unlikely for the short leg to be assigned. But if it was, then that assignment would be strongly offset by the long option leg. For out-of-the-money debit spreads, they are long gamma (accelerating directional exposure), long vega (sensitivity to implied volatility), and short theta (which means the premium gradually decays the value of the option over time). This time decay is measured by a first-order Greek known as theta.

**defined risk**: In an option strategy, if risk is defined then it is structured so that it has a max loss (capped total loss on a trade) rather than potentially unlimited loss.

**IV (implied volatility)**: The expected percentage range over a year with 68.3% confidence. This is based on options pricing at one standard deviation. Long options benefit from increases in implied volatility and short options benefit from decreases in implied volatility. In general, when implied volatility increases it means that the expected percentage range is getting larger. When implied volatility is applied to lengths of time other than one year, then this is called the expected move.

**IV crush**: A sharp drop in implied volatility which causes the price of an option to deflate. Short options benefit from IV crush and long options lose value from IV crush.

**Put Wall**: The Put Wall is our major support level, which measures the most amount of negative gamma in the market. This shows us what the bottom of the probable trading range is (the lower bound).

**strike**: The price that an option is based on. A long call will expire worthless if the price of the underlying security finishes underneath the strike price, and a long put will expire worthless if the underlying finishes above the strike price.

**synthetics**: In options, synthetics are different structures that have the same logical dynamics, including the same max loss, max profit, chance of winning, and option Greeks. Synthetics are possible because options have the property of put-call parity. For spreads, long puts can be swapped for long calls and short puts can be swapped for short calls (and vice versa) in a way that creates synthetic matches without the need of adjusting deltas with shares. On single-leg options, however, puts and calls can be swapped in the same way, but require directionally-offsetting positions in the underlying security (such as a certain amount of shares).

**theta**: The measurement of how much an option's price changes relative to time. Often used to mean time decay, theta gets stronger in an accelerated fashion as the time of an option runs out. If long an option, then time decay causes net losses (unless more is *earned *from increases in implied volatility or sharp and favorable price movements). And if short an option, then time decay causes net profits (unless more is *lost *from increases in implied volatility or sharp and unfavorable price movements).

**vega**: A first-order Greek which measures the sensitivity of an option to changes in implied volatility (the expected percentage range based on option prices with 68.3% confidence). When we say extrinsic value, this pertains directly to vega and theta (the sensitivity of an option to time decay). As options run out of time on the contract, vega decreases. This is why we often see short duration options with very high implied volatility amounts: the higher implied volatility is balanced out by a smaller slice of vega, which is the influence of implied volatility on the price of an option.

**VT (Volatility Trigger™)**: The VT is our proprietary indicator which detects the level below which we expect bearish feedback loops (chain reactions) to start kicking in. Above this level we expect bullish flows that lead to relatively lower market volatility. Underneath the VT, realized volatility (the expected percentage range over a period of time based on historical data with 68.3% confidence) is modeled to expand significantly. In the Equity Hub™, a similar calculation is used for what is called the Hedge Wall.

**width of the option spread**: The width of the spread is a key mechanic when designing an option strategy to make a trade. In a vertical spread (both options are on the same date), the width is the difference in strikes. For a horizontal spread, both options are on the same strike but a different date). The width of the spread on horizontal spreads is the time width, which is the difference in DTE (days to expiration) between both sides of the spread.