Prerequisite: Experience setting up Credit Spreads

What is a .10 Delta?

Delta is a probability Indicator.

A .10 Delta represents a 10% chance that a CALL or PUT option expires ITM (in the money). In other words, the buyer has a 10% chance of winning. In reverse, a .10 delta would also mean the option seller has a 90% chance of winning. As a credit spread trader, we are the sellers. The probability is in our favor.

Find the .10 Delta

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Applying the .10-Delta

We want to apply the .10 Delta strategy to the anchor leg of the credit spread.

The anchor leg is always the SOLD-OPTION for credit spreads.

Conceptual model

Bullish setup: Call side

1. set your expiration
2. set your anchor at the .10 delta
3. set your hedge

Visual example

Conceptual model

Bearish setup: put Side

1. set your expiration
2. set your anchor at the .10 delta
3. set your hedge

Visual example

Conceptual model

Get as close to .10 as possible

Sometimes, the market won't provide a .10 delta. You might see a .8 or a .12. It's up to you to take more risk for more reward or less risk for less reward. In these scenarios, I will take less risk and less reward to maintain consistency.

RISK MANAGEMENT

The following rules can be applied to 1,2 and 3 Day expirations.

Let the Dust Settle

Personally, I do not execute credit spreads on the open. I like to wait 30-90 minutes for the market to choose a direction and pick up momentum.

• Allowing the dust to settle reveals where there may be support or resistance.

Be Cautious with Major News

Do not execute this trade if your expiry falls on a day of significant economic news or major earnings reports.

• To increase your odds, wait for 1 or 2 days after a significant event.

Boring Business Cycle

• .10-Delta Credit Spreads are more profitable on boring weeks with less important business cycle data.

Placement

• When the market is overextended, it tends to whip back to reality. Using multiple time frames and RSI we can increase the probability of the market moving in our direction. I like to use the 30-minute, 1-hour, and 4-hour time frames to identify an overextended RSI and set up the .10-delta spread.

The RSI moves into oversold territory, prompting a 10-delta Put credit spread (expiring one, two, or three days later). As you can see, the price bounced higher the next couple of days, allowing the credit spread to expire up 100% in the money.

How to Manage the Downside

When the market gaps towards your anchor, be ready to exit the trade for a small gain or loss.

If Price gaps towards your anchor on the expiration day, be ready to exit the pullback or the break of pre-market levels.