Strategy Source

Creator/Channel: Levi Woods

Published Date: Jan 4, 2026

Video Link: https://www.youtube.com/watch?v=8HLIvSLLvcc

Trade Setup

Action (Sell (-)/Buy (+))	Leg	DTE	Strike Price / Delta Target	Width
Sell (-2)	Call	10	$34	Not detailed in source transcript
Buy (+3)	Call	100+	$35	Not detailed in source transcript

• Total Capital Required: $915 initial debit.
• Execution Context: The video demonstrates this strategy using a historical real-world trade example entered on November 4th when the underlying stock (Chewy) was trading at $33.49.

Strategy Application

The Ratio Diagonal is a highly directional options strategy tailored for stocks where the trader has a strong conviction to the upside or notes that an asset has hit a key support level with the potential to break out or double.

• Strike Selection Mechanics: While specific Delta boundaries are not structurally used to choose strikes, the strategy targets a net positive position Delta (strike metric / directional bias or “probability of success”) of 72. This synthetic layout mimics owning 72 shares of stock at entry.
• The Asymmetric Ratio: The core architecture operates as an asymmetric 2:3 ratio. By selling 2 near-term calls and buying 3 long-term calls, the trade functionally builds two traditional diagonal spreads running alongside one standalone, unhedged long call option.
• Buffer Zone: The safety cushion on the downside relies entirely on the defined-risk profile of the strategy. If the stock breaks down below the entry price, the downside risk is firmly capped at the net debit configuration, avoiding the steeper losses often seen in high-Delta synthetic stock plays or direct stock ownership.
• Time Differential: The strategy relies heavily on a wide DTE gap to exploit Theta (“time decay” mechanics). Short options are sold with short-term expirations (10 days in this example) to continuously harvest rapid near-term decay, while the long options are purchased 100+ days out to keep the upside exposure open without near-term time erosion eating the position.
• Market Environment: This strategy is deployed when short-duration contracts feature elevated implied volatility, allowing the trader to collect high near-term extrinsic value. It targets liquid underlyings prone to big breakout moves rather than sideways consolidation.

Risk Profile

• Wing Widths & Structural Parameters: The trade features a defined maximum risk profile. The absolute structural loss on the trade is $1,014, a figure tracking slightly higher than the entry debit due to structural pricing behavior when calculating absolute expiration boundaries across mismatched dates.
• The Valley of Death: An asymmetric risk zone exists directly above the short strikes in the profit profile graph. If the underlying asset makes a small, fast upward move right into the short strike at the near-term expiration, the short contracts can expand in value faster than the long-term contracts, creating a temporary valley of negative return.
• Liquidity Risk: Because this is a multi-option contract arrangement requiring regular adjustments, wide bid-ask spreads act as an operational drag. Highly liquid underlyings are required to prevent slippage during rolling operations.
• Capital Preservation: This strategy is allocated using small position sizes relative to the overall portfolio. Managing a max risk of roughly $1,100 per trade inside a large account ensures that a full maximum loss scenario has a negligible impact on total portfolio capital.

Expected Outcome

1. The Consolidation Zone (Your Base Win)

If the stock stays completely flat or stalls in a tight sideways consolidation range, the strategy generates continuous cash flow. The near-term short options decay rapidly due to positive Theta, letting the trader pocket the premium, lower the position’s overall cost basis, and steadily reduce total risk capital.

2. The Rocket (The Primary Target)

If the underlying asset experiences an explosive upward breakout past the short strikes, the positive position Delta dominates. Because you own three long calls against only two short calls, the unhedged contract captures pure, uncapped upside gains as the stock rallies.

3. The Experimental Strangle (The Put Variation)

An experimental variation incorporates a long out-of-the-money put option expiring far out in time to insure against downside market crashes. However, this structure introduces a heavy Vega (“volatility risk” or the impact of implied volatility) and premium drag; if the stock rallies, declining implied volatility crushes the long put’s value, which can offset the gains made by the advancing call legs and leave the trade at a relative break-even.

Management & Exit Triggers

• Primary Target: If the stock shoots up into a major directional rally, the entire multi-leg position can be closed out completely to capture the profit.
• Rolling Routine (Sideways Market): When the short-duration contracts reach expiration, if the stock remains neutral, the two short calls are rolled out to the next expiration cycle at the same strike price ($34) to collect a fresh premium credit.
• In-the-Money Adjustments (Moderate Up Move): If the stock rises slightly above the short strikes, the 2 short contracts can be split during the roll—moving one contract deep into the money and the other further out of the money to shrink the upside risk valley.
• Defensive Stop Loss (Down Market): If the stock drops significantly, the trader can choose to stop selling short calls on down weeks. The position is allowed to sit quietly as a regular long call option, giving the asset time to rebound before the 100+ DTE contracts expire.