When considering options strategies, it’s tempting to focus solely on payout or yield for credit-based approaches. However, investors must remember that there is a direct relationship between risk and reward: the higher the risk, the greater the potential reward. In some rare cases, though, this relationship becomes skewed in favor of the risk taker or speculator.

One great example that popped up is Texas Instruments (TXN). While TXN stock hasn’t gotten off on the right foot, losing more than 21% of equity value since the beginning of this year, in the long run, the security has been quite stable. With a 60-month beta of 0.99, TXN tends to absorb kinesis. In other words, it’s not going to react too much in either direction.

This muted reaction can be a golden ticket for the unique geometries of multi-leg options strategies. Essentially, by removing volatility from the equation, you can structure trades that benefit from relatively small movements in the underlying security. Not only that, low beta can represent a massive advantage for what I term risk-inverted option spreads.

In a standard debit-based vertical spread, the speculator buys a debit in the hopes of a specific outcome materializing. As such, the debit buyer necessarily starts off in a cash outflow state; that is, the trader must pay the debit required to enter the position. Invariably, then, the security must exceed the magnitude of the debit to break even on the trade.

On the other end, those who sell vertical spreads adopt a credit-based approach. They receive the debit paid to enter the trade, which is a credit on their side. By logical deduction, credit sellers start from a cash influx position. This influx represents the safety margin of the underlying trade or how much the stock can move against the position and still be profitable.

What’s remarkable about certain TXN put spreads is that this safety margin stands on the side of the debit buyer, not the credit seller.

Using Simple Math to Find Favorably Inefficient TXN Stock Put Spreads

One of the most powerful but overlooked tools within the arsenal provided by a Barchart Premier membership is the ability to download historical data. From here, you can easily calculate the statistical tendencies of TXN stock or any other security, giving you an underappreciated edge in the markets.

In the case of TXN, there have been 1,953 weeks, discoverable using a simple “COUNT” logic in Excel. Of this figure, you can apply a “COUNTIF” logic to find the number of positive weeks, which is 1,037 or a bullish success ratio of 53.1%. Thus, on any given week, TXN commands an upward bias.

However, because certain TXN stock put spreads feature risk inversion, the safety margin usually afforded on the credit side is tacked onto the debit side. From a functional standpoint, this means that we can apply the margin to the aforementioned “COUNTIF” logic, essentially creating a true probability of profit.

And if the true probability is greater than the probabilities assigned by market makers or their perceived view of the odds? You have a favorable pricing mismatch — that you can potentially exploit.

In my opinion, the biggest options mismatch is the 155/150 bear put spread for the options chain expiring April 17. In four days (since the final day of the week is Good Friday), if TXN falls to the $150 short strike and stays there at expiration, the speculator will collect the maximum payout of nearly 54%.

That’s massive but the wild part? On Friday, TXN stock closed at $147.60, meaning that the security can win in three ways: it can fall, it can move sideways and it can even go up by 1.6% — and the spread would qualify for the max payout.

This can’t be stressed enough: you can be right in your speculation or slightly wrong and you’ll still be the winner!

What’s more, the math checks out. You see, the odds that TXN will rise by over 1.6% in any given week is only 36.76%. That gives a bearish success ratio of 63.24%, which is better than the probability of profit of 61.9%. And remember, this latter figure is the probability of any profit. The aforementioned 63.24% ratio represents the odds for full profitability of the 155/150 bear put spread.

The Beauty of Risk Inversion

Lastly, whenever these risk inversion opportunities materialize, it’s good practice to at least run the numbers and consider the proposition. That’s because at the end of the day, a debit-based approach with core characteristics of credit spreads represents the best of both worlds.

Easily, one of the devastating aspects of credit-based strategies is tail risk. Yes, you start the position off with a cash influx but you’re also hoping that the clock runs out on the debit buyer before the security moves in their favor. Otherwise, if a credit spread blows up, there is an exponentially large assignment risk.

So, that 25% yield you were tempted by? If this trade goes sour for you as the seller, that’s a 4X loss of the cash principal you received. Take a couple 4X losses at scale and you’re incurring a losing proposition — fast!

At least with the debit spread, there is no tail risk — just the risk for which you already paid upfront. And in a risk-inverted spread, you pay the debit but start on paper in a cash influx position, merely waiting for theta (or time decay) to accelerate.