Part XII · Strategy atlas · Chapter 12F
From a market view to a structure
A cross-index
Chapters 12B to 12E sorted the strategies by structural family, for looking one up. Trade design usually runs the other way: you start with a view and look for the structures that express it cleanly. This chapter is that inverse mapping, a cross-index from market views to structures, with the ones to avoid and why.
- The four-question filter and the selection matrix (Chapter 12A).
- The strategy entries, with their payoffs and Greeks (Chapters 12B to 12E).
- Days to expiry and the choice of expiry (Chapter 11M).
- The implied move and the IV crush around earnings (Chapters 11I and 12A).
1 · How to use the cross-index
- Identify your view in the left column, for example "I expect SPX to drift up over 2 to 4 weeks".
- The middle column lists the structures that express the view, ordered roughly by preference for a typical swing-trading retail account.
- The right column flags structures that look as if they would work but have hidden problems for this view.
"Shares" in the tables means holding the stock or ETF itself, long or short, and DTE is the days to expiry of the options. The preferences come in groups of related views, each with a short note on the logic behind it.
2 · Directional views
| View | Prefer, in order | Avoid, and why |
|---|---|---|
| Modest bullish drift, 1% to 3% over 2 to 4 weeks | Shares; a call debit spread (45 DTE); a put credit spread (30 DTE, below support); a diagonal call, long an at-the-money (ATM) back-month call and short a front-month call near the target | A naked long call: theta and vega risk for a marginal directional gain. A short put strangle: an asymmetric tail |
| Strong bullish breakout, more than 5% in 1 to 2 weeks | Shares; a long call (30 to 60 DTE, slightly out of the money); a call debit spread, if IV is elevated | A calendar or diagonal: slow-drift vehicles, wrong for breakouts |
| Bearish breakdown, momentum continuing down | A put debit spread (30 to 60 DTE); short shares, in an equities account; a bear call spread (above resistance) | A naked long put: vega risk on the volatility spike. A short call: an unbounded loss |
| Modest bearish drift | Short shares; a put debit spread; a call credit spread | A long put, which overpays for a slow move |
The logic follows the size and speed of the move. A small, slow move barely pays for a single option's premium, so it favors spreads, which sell the part of the payoff you do not expect to reach. A large, fast move is what a single option's convexity is for. Structures that sell time, such as calendars and diagonals, suit a drift and fail in a breakout.
Step 1: price the choices. Take SPX at 6,000, a 30-day horizon and a hypothetical implied volatility of 16%, with interest ignored. The Black-Scholes model prices the 6,000 call at about 110 points, as the at-the-money shortcut of Chapter 5E confirms: . The 6,150 call prices at about 52, so the 6,000/6,150 call debit spread costs about 58.
Step 2: the breakevens. The long call breaks even at 6,110, a rise of 1.8%. The spread breaks even at 6,058, a rise of 1%.
Step 3: the drift you expect. At a 2% drift to 6,120, the call makes about 10 points on the 110 it risked, while the spread makes about 62 on its 58. At 1%, the call loses about 50 points while the spread about breaks even. At 3%, the spread's 92 still beats the call's 70.
Step 4: where the call wins. The call beats the spread only above about 6,202, a rise of 3.4%, which is outside the view. For a modest drift, the spread sells upside you do not expect, and pays for most of the theta and vega you would otherwise carry.
Drag the expected rise from the example's drift toward a breakout. The spread wins across a 1% to 3% drift, and the call pulls ahead only once the move passes about 3.4%.
| P&L and return | at +1% | at +2% | at +3% |
|---|---|---|---|
| shares | +60 | +120 | +180 |
| long call | −50 | +10 | +70 |
| call spread | +2 | +62 | +92 |
3 · Mean reversion
| View | Prefer, in order | Avoid, and why |
|---|---|---|
| Oversold, expecting a rebound | Long shares; a put credit spread; a call debit spread | A long straddle: it needs no directional bias, and the bias here is bullish. An iron condor: it caps the upside |
| Overbought, expecting a fade | Short shares; a bear call spread; a put debit spread | A naked call: an unbounded loss. A long put: overpriced after the run |
A mean-reversion view has a direction, so it wants a directional structure, not a volatility one. A straddle pays for both directions when you expect one, and a condor caps the move you expect.
4 · Range and volatility
| View | Prefer, in order | Avoid, and why |
|---|---|---|
| Range-bound consolidation, no clear direction | An iron condor; an iron butterfly; a short strangle (advanced, defined size only) | A calendar or diagonal: these need a slight directional bias, not a pure range |
| Compressed, expecting volatility to expand, direction unknown | A long straddle; a long strangle; a calendar (long forward volatility) | Short premium of any kind: you would be selling volatility that is about to rise |
| Volatility expansion priced in, expecting a crush | A short straddle, preferably with defined risk as an iron butterfly; an iron condor; a calendar with a crush expected | A long straddle: you would be buying volatility that is about to crush |
These rows turn on the volatility view, not the direction. Buy options when implied volatility is low and expected to rise, and sell them when it is high and expected to fall (Chapter 5G).
The two traditions this book draws on disagree about the condors in the first and third rows, and both positions stand. The atlas ranks the iron condor first for a range. The Edge Book rejects systematic iron condors for retail accounts and allows only occasional, discretionary ones at extreme implied volatility, sized small (Chapters 10I and 12C).
5 · Around earnings
| View | Prefer, in order | Avoid, and why |
|---|---|---|
| Pre-earnings momentum, exiting before the event | Shares; a long call (30 to 45 DTE); a call debit spread | A diagonal call: its front-month short loses on the IV ramp. A calendar: the same problem |
| Post-earnings drift or gap-and-go, the PEAD | Shares; a call debit spread (30 to 45 DTE); a put credit spread (below the gap) | A calendar or diagonal: the post-event surface has collapsed, and these are pre-event vehicles. Options with 7 DTE: theta destroys them before the drift develops |
Before an earnings report, front-month implied volatility ramps up, which hurts any structure short the front month (Chapter 11I). After the report, the volatility surface has already collapsed, so the calendars that trade event volatility have nothing left to trade. The drift after a report takes time, which short-dated options cannot give it (Chapter 11J).
6 · Income and hedging
| View | Prefer, in order | Avoid, and why |
|---|---|---|
| Income on an existing equity position | A covered call; a collar, if you are concerned about a fall; a diagonal covered call | Selling cash-secured puts on the name you already own: it concentrates the risk |
| Hedging a long equity book | A long put, 30 to 90 DTE and 5% to 10% out of the money; a collar; a put spread, for a defined cost | Selling the underlying, which gives up the upside; this depends on the tax and cost-basis context |
| Long volatility hedge for a short-volatility book | A long VIX call, 90 to 180 DTE and out of the money; a long SPX put, 90 or more DTE and 8% to 10% out of the money; a long calendar | Short-dated VIX calls: theta destroys them before the stress unfolds |
A hedge has to last as long as the risk it covers. That is why the hedge for a short-volatility book prefers 90 days or more, and avoids short-dated options that decay before a stress arrives.
7 · Specialist views
| View | Prefer, in order | Avoid, and why |
|---|---|---|
| Skew trade: put skew rich, expecting it to normalize | A put ratio spread, long the inner put and short more of the outer; a short put spread funded by a put debit spread | A naked short far out-of-the-money (OTM) put: it catches the falling knife |
| Term-structure trade: front month rich against the back | A calendar (sell the front, buy the back); a diagonal (the same idea, at different strikes) | A direct outright volatility trade without the term-structure exposure |
| Synthetic financing: no cash for shares | A synthetic long (long call and short put, ATM); a long deep in-the-money (ITM) call, which acts like shares | Margined shares, which pay interest rather than being directly synthetic |
Each specialist row isolates one feature of the volatility surface or one financing need, and names the structure that holds only that feature.
8 · Notes on the cross-index
- The ordering is for typical retail swing accounts: $100k to $1M, options-enabled, comfortable with 30 to 60 DTE positions. Different scales and risk preferences justify different orderings. Portfolio managers running pure premium-selling books have different defaults than discretionary swing traders.
- Liquidity is assumed. Many of the structures need deep options markets, such as SPX, SPY, QQQ and large-cap single names. On an illiquid underlying, shares are often the only safe expression.
- Tax context matters. SPX and XSP options receive the Section 1256 60/40 treatment and SPY options do not, so an index view favors the cash-settled SPX or XSP version of a structure when account size permits (Chapter 2E).
- The avoid column is structural, not absolute. A structure listed as "avoid" might be right in unusual conditions. A calendar might work for a breakout, for example, if the implied-move surface is unusually flat. The avoid column captures the typical case.
- Greek profiles still apply. Every structure has its own delta, gamma, theta and vega profile. The cross-index narrows the candidates, and the entries of Chapters 12B to 12E give the Greeks that decide among them.
When designing a trade, identify the view, narrow the candidates with this index and consult the entries for Greeks and risk. Then apply the conviction score, or the Real Value score for a single name (Chapter 13B), and enter through the pipeline of Chapter 13C.
The cross-index reads like a differential diagnosis. The presenting view sets the candidates, ranked by how often each fits, and the avoid column lists the contraindications. As in medicine, most contraindications are relative: a calendar is relatively contraindicated in a breakout, not forbidden, and the notes name the exception.
Write the view with its size, speed and horizon before you open the tables: "1% to 3% up in 2 to 4 weeks" picks a different row from "more than 5% in a week". Take the first structure your account can trade, check its liquidity and its tax treatment, and read its entry for the Greeks before you size it. For an index view in a taxable account, look first for the XSP or SPX version.
The cross-index assumes you know which view you hold. A drift that becomes a breakout leaves a spread's gain capped, and a breakout that fails leaves a long call to decay. The preferences also assume liquid markets and a typical retail account, and they change with the scale, the costs and the taxes of yours.
- Match the structure to the size and speed of the move: spreads for a modest drift, long options for a fast breakout, and structures that sell time only for a range.
- Buy options when implied volatility is low and expected to rise, and sell them when it is high and expected to fall.
- Do not hold a front-month short through an IV ramp before earnings, and do not trade event volatility after the event.
- Give every hedge at least as much time as the risk it covers.
A trader expecting a 2% rise buys an at-the-money call. The call needs about 1.8% just to break even at a 16% implied volatility, so the view can be right and the trade barely profitable. A call debit spread, or the shares, expresses a drift better.
- The cross-index starts from a view and lists preferred structures in order, with the ones to avoid and why.
- Directional views pick by the size and speed of the move: spreads for a drift, long options for a breakout.
- Volatility views pick by whether implied volatility should rise or fall, and earnings views by the IV ramp before the event and the crush after it.
- Hedges need time, and specialist trades isolate one feature of the surface.
- The avoid column is structural, not absolute, and the preferences assume liquid markets and a typical retail swing account.
9 · Check yourself
Question 1
You expect SPY to rise about 2% over three weeks, with implied volatility normal. Which structure does the cross-index prefer after shares, and which does it tell you to avoid?
Answer
A call debit spread of about 45 DTE comes next after shares, then a put credit spread below support. Avoid a naked long call, whose theta and vega cost too much for a marginal directional gain.
Question 2
You expect a stock to break out more than 5% within a week. Why does the cross-index avoid a calendar?
Answer
A calendar is a slow-drift vehicle that profits when the price sits near its strike at the near expiry. A fast breakout carries the price far through the strike, where the calendar loses.
Question 3
You plan to hold a momentum position into the week before earnings and exit before the report. Why is a diagonal call a poor choice?
Answer
Its front-month short call loses as front-month implied volatility ramps up before the report. A long call or a call debit spread avoids the short front leg.
Question 4
You run a book of short index options and want a hedge against a volatility spike. What does the cross-index suggest, and what should you avoid?
Answer
A long VIX call with 90 to 180 DTE, out of the money, or a long SPX put with 90 or more DTE, 8% to 10% out of the money. Avoid short-dated VIX calls, which decay before the stress unfolds.