Mike,
Trading Framework suggests 10 delta as a guide or a starting point to look for short strikes. Because of the skew we have been going a little higher on the put side and the call side. When we look for a new set up we look at each spread individually. We want to sell a put spread for about .80-.90 cent credit and a call spread for about .80-90c. So the total for both spreads we’re looking to receive is around 1.60-1.80
If we get an average of .85c per side that’s about 9.28% return on risk (10 point wide spread).
10(width of the spread)-.85(credit of the spread)=9.15(margin), (85/915)*100= 9.28%
Now, we’re getting 2 credits, one for the put spread and one for the call spread. So .85*2= 1.70 while margin requirement remains the same (we can only lose on one side, so most brokers will only require margin for one side of the trade). We take total credit (1.70) divide that by margin (9.15) to get total return on risk (ROR) of 18.57%
Hope this helps to clear things up a bit, if not reply here or join us in the chat
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