Triple Layer Cake Options Trade Strategy

If you are looking for an options trading strategy that increases probability while offering unlimited upside and reduced risk, then the Triple Layer Cake options strategy may be a good fit for you.

Since early 2020, this has been both a favorite options trade of mine as well as a popular one in our community.

I named it for the three main benefits of the trade which coincide with the three primary objectives of the trade.

Below, I’ll describe the Triple Layer Cake (TLC) strategy, but first I want you to know that each week on Wednesday, I bring up numerous real world opportunities to put on a TLC options trade. If you like the concept of the Tripe Layer Cake, then join Forma Financial Premium to get actionable trade ideas each week.

Here are the three benefits and three objectives of the Tripe Layer Cake options trading strategy

Benefit #1 – The premium you collect pays more than your costs. The objective is to sell put credit spreads that cover all costs of the trade, including commissions, slippage estimates, the long call option.

Benefit #2 – Asymmetric reward. Have you ever traded a “high probability” trading strategy only to realize that the losers — although occurring less often — are many times larger than the winners? If you prefer a higher probability win rate plus losers that are mathematically impossible to be multiples of your biggest gains, then you’ll love this trade. This is because the long call provides unlimited reward and the put credit spread has a defined amount of risk. And since the put credit spread pays you more premium than the cost of the long call, you are in a position to earn income even if your wrong on direction.

Benefit #3 – Have a directional edge. A directional edge is any statistically significant reason to expect movement in a certain direction. The objective is to define your directional edge based on expectancy rather than probability.

My preference is to use TLC options trades on individual stocks (rather than ETFs and indexes) and to make sure the underlying stock price is well above $50. The price point directly impacts your costs as each option has a fixed cost and low underlying prices require more options to take on the desired size.

At this time, RSI and DMI are my directional indicators of choice, but I select the symbols based on either a top-down sector-stock analysis exercise or by filtering for a variety of fundamental and performance factors on finviz.com

There is much more to share about this trade, but these are the essential elements. I would love to see you in our weekly online meetings to check out current stock and options trades.

Join today to learn more about the Tripe Layer Cake and other stock, options, and futures strategies.

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