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Options trading can seem complex, but with strategies like “wrap orders,” you can simplify the process and maximize your returns. A wrap order combines two options into a single trade, creating a defined risk and reward structure.
This strategy is ideal for traders looking to capitalize on small stock movements while controlling risk.
What Are Wrap Orders?
A wrap order is a type of debit spread involving two options: buying a lower strike price option and simultaneously selling a higher strike price option. These trades “wrap” around the current price of the stock — hence the name “wrap order” — targeting small movements to achieve substantial returns.
Here’s the beauty of wrap orders:
- Defined Risk: Your maximum loss is limited to the cost of entering the trade.
- High Reward: A small movement in the stock — often less than 1% — can yield up to 100% ROI.
- Efficiency: Wrap orders cost significantly less than buying outright call or put options, making them accessible even for small accounts.
How Wrap Orders Work
The key to a successful wrap order lies in selecting two strike prices that are close to the stock’s current price. For example:
- Current Stock Price: $100.
- Buy to open: Call at $99 (lower strike price).
- Sell to open: Call at $101 (higher strike price).
This creates a $2 spread between the strikes, and your goal is for the stock to close above $101 by expiration. If it does, you achieve the maximum profit.
- If the spread costs $1 to enter, your maximum risk is $1.
- If the stock closes above $101, the spread becomes worth $2, doubling your investment for a 100% ROI.
When to Use Wrap Orders
Wrap orders work best in specific scenarios:
- Bullish Sentiment: Use call spreads when you expect the stock price to rise.
- Bearish Sentiment: Use put spreads when you expect the stock price to fall.
- Strong Momentum: Wrap orders perform well on high-momentum stocks with weekly options.
Step-by-Step Guide to Placing Wrap Orders
- Choose the Stock
Look for stocks with weekly options and a history of strong momentum. Ideal candidates are stocks priced above $50, as they tend to have smaller percentage moves required for profitability. - Select Strike Prices
Identify the stock’s current price (ie. $100). Choose a strike price just below the current price for the option you’re buying (ie. $99). Choose a strike price just above the current price for the option you’re selling (ie. $101). - Calculate the Cost
The cost to enter the trade is the difference between the premiums of the options. Aim for the entry price to be around half the spread width. For a $2 spread, aim for a $1 entry price. - Place the Trade
Go to your trading platform and select “vertical spread” or input the options manually:- Buy to open: Lower strike option (ie. $99 call).
- Sell to open: Higher strike option (ie. $101 call).
Ensure the trade shows as a net debit, not a credit.
- Monitor the Trade
Your goal is for the stock to close above the higher strike price (or below for bearish trades) by expiration. Decide whether to hold until expiration or close early if you’ve hit your profit target.
Scenarios to Understand
Wrap orders have distinct outcomes based on the stock’s performance:
- Stock Moves in Your Favor:
If the stock closes above the higher strike, you achieve the maximum profit. - Stock Stays Flat:
You may break even or incur a small loss, as time decay affects the premium. - Stock Moves Against You:
If the stock closes below the lower strike, you lose the cost of entering the trade.
Tips for Success with Wrap Orders
- Trade Weekly Options: Weekly expirations allow you to stack gains faster than monthly options.
- Avoid Low-Priced Stocks: Stocks under $50 often require larger percentage moves for profitability.
- Be Consistent: Aim for a 70% win rate over time to achieve compounding returns.
- Avoid Major Events: Close trades before earnings or other binary events and catalysts unless you’re specifically trading them.
Now, let’s say Nvidia (NVDA) is trading at $143.50. You believe it will rise by Friday, so you place a wrap order:
- Buy: $143 call
- Sell: $144 call
- Cost to Enter: $0.50
If Nvidia closes above $144 by expiration, your trade is worth $1, netting you a 100% ROI. If it closes at $143.50, you break even.
Why Wrap Orders Work
Wrap orders leverage the power of defined risk and reward, making them ideal for small accounts or traders seeking consistent returns. By requiring minimal movement in the underlying stock, wrap orders let you profit even in stable or slow-moving markets.
With their simplicity and effectiveness, wrap orders are a must-have in any trader’s toolbox. Whether you’re bullish or bearish, this strategy gives you the flexibility to adapt while targeting consistent, meaningful returns.
Start experimenting with wrap orders today, and transform your trading results!
Graham Lindman
Graham Lindman Trading
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