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Kim describes the strategy in detail here but the idea is basically to start with a CTM IC for say 4.75 credit (on a 10$ spread) and deltas of the short strike of ~25. So the odds of the index (not sure if I'd apply this strategy for stocks) going to or trough the short strike are ~50% so you have a relatively high probability of the need to adjust the trade. If you eventually do adjust and roll either the call spread or the put spread and pay say 1.5 - 2$ to do so, you end up with only 2.75 credit and the strikes (and probably ~ the same credit) had you initiated a IC with wider strikes in the 1st place HOWEVER there is also a ~50% chance the index doesn't move enough to trigger an adjustment and then the CTM IC has a much higher reward (in % of initial margin) that the OTM IC. So all you need is a quiet period once in a while and your IC to give you a much higher return so make this strategy to outperform. I personally prefer it to the OTM IC also because the higher initial credit (I look for 4.50$+ on a 10$ spread) limits my risk in case of a big move better than a 1$ credit for a 10$ spread. If the market drops 10% in a day or two and IV jumps, both IC will be in bad shape but for one I got 4.50 credit so the max loss is 5.50 while the other one will cost me 9$. If you trade IC's long enough and pretty regularly you WILL get to a period where the market is just moving rapidly trough your short strikes (usually happens quicker if market drops) and then it's all about damage limitation and the question is how much of you previous gains do you give up then. If you trade 1$ credit spreads with 2 weeks to maturity one bad trade will easily wipe out 4 months+ of gains (assuming you kept all the credit on the previous trades) as you'll have little time to react/adjust before you hit the max loss. With CTM IC and closing them ~3-4 weeks ahead of expiry (having them opened 8-7 weeks before expiry) the price moves from maybe 4.50 to 7 if the market drops sharply - much easier to stomach than the 1$ IC moving to 9$+ for the same move. Having said that you'll find other members here who love the OTM IC and seem to trade them successfully over a large no of trades - so its all about how you manage them.

For the strikes of the calls on the hedge, I use the one closest to .80 delta when I enter. I want fairly close to a $1 for $1 move if the price goes up. I also want to be able for it to lose as little value as possible over time. Also please note that this only protects a sudden move to the downside. It is quite rare to have a sudden "spike" of 400-500 points, but if that did happen, we would be exposed. You could protect against this by having a VXX strangle, but that gets cost prohibitive. As for "easy formula", no, you have to hedge what you're comfortable with. I vary it depending on how exposed I am to a swift downturn in the market, so its a position which gets adjusted from time to time. If I "only" have this type of trade on, I'll use about 20% of my expected profits over a period to purchase. So, if I was expecting, all things behaving, to make $1,000.00 over one month, I'd spend about $200 purchasing a hedge. This is what I've grown comfortable with -- if you want more protection, buy more.