Strategy Source

Creator: Tom King

Published Date: July 1, 2024

Video Link: https://www.youtube.com/watch?v=kYJzXv-c67k

Trade Setup

The XL112 is a multi-leg, Delta-neutral strategy designed for flexibility. The following table illustrates the adjustment of the Put Debit Spread (PDS) component of an existing trade.

Action (Sell (-)/Buy (+))	Leg	DTE	Strike Price / Delta Target	Width
+ (Buy Back)	Put	Not Specified	4950	N/A
– (Sell)	Put	Not Specified	5150	200 (Current) -> 50 (New)

• Total Capital Required: Not detailed in source transcript.
• Execution Context: The video demonstrates a real-time adjustment (roll) of an existing open trade.

Strategy Application

The XL112 functions as a “Swiss army knife” trade, providing structural flexibility to hedge positions early in the cycle while acting as an income generator as time progresses.

• Strike Selection: The trade begins with a Delta (strike metric / directional bias) that is near-neutral. Over time, as the market moves, the goal is to manage the Delta exposure—specifically, the creator notes keeping the short legs at lower Delta levels (e.g., ~18 Delta) compared to standard 112 strategies to allow for greater management room.
• Buffer Zone: The trade is structured with a wide “trap” (a profit zone). The Buffer Zone acts as a safety cushion; if the market does not sell off, this trap eventually moves “farther and farther from the money,” allowing the trader to shrink the spread size to harvest profit.
• Time Differential: Because the trade is held for extended periods (e.g., 40 days in this example), it relies on Theta(time decay) to work in the trader’s favor. The strategy is designed to be adjusted periodically rather than managed on a fixed schedule.

Risk Profile

• Wing Widths: The trade utilizes a PDS as a “trap.” Initially, the spread was 200 points wide; the adjustment reduces this to 50 points wide to lock in gains and reduce total exposure.
• Maximum Loss: Not detailed in source transcript.
• Structural Considerations: The trade is designed to offer downside protection. As the market remains stable, the risk of holding such a wide trap becomes unnecessary, prompting the reduction in width to minimize capital at risk.

Expected Outcome

1. The “Tail” (Your Base Win)

The “Tail” refers to the profit zone outside of the main trap area. The creator notes that even when the trade is not perfectly centered in the trap, the tail can still generate significant profit potential (noted in the video as approximately $13,400 in the specific example provided).

2. The “Trap” (The Income Zone)

The trap is the central profit-generating region. The goal is to collect credit while maintaining this zone. When the market does not challenge the trap, the width is reduced to secure income and free up capital.

Management & Exit Triggers

• Primary Target: Reducing the width of the Put Debit Spread to generate immediate credit (e.g., $1,650 in the provided example).
• Defensive Adjustments: Since this is not a “campaign” trade, adjustments are made based on evolving market conditions and the specific profit/protection needs of the portfolio, rather than fixed-percentage rules.

Would you like me to explain how the “112” naming convention differs from standard vertical spreads in more detail?