Catching Butterflies trading options can be a rewarding experience!
What is an Options Butterfly?
An Options Butterfly consists of a Debit Spread combined with a Credit Spread. The body of the butterfly is comprised of the two short positions combined together (the body of the butterfly) while the two long positions, one on each side of the body are called the wings. The beauty of a butterfly trade is the low cost compared to the potential return if the trade pins near the body or ITM.
Any stock (ETF), that has options can be Butterfly traded. My favorite is the SPX Butterfly which is cash settled (meaning it can’t be closed against the trader – the trader is the only one who can close the trade and, if not closed, will become cash settled at expiration).
To buy a SPX butterfly you would place your pointer on the strike that you want to be the body (the two short positions) of the butterfly , right click on that strike go up to buy and then click on butterfly. This will open a 5 point SPX Butterfly Spread Trade. As I write this the SPX closed today at 5127.79. A five point Call 5125/5130/5135 spread would have been ITM (In-the-money) and returned $127.79 minus what you paid for the butterfly.
I like to trade the SPX 0DTE after 1 p.m. (as late as possible) in the afternoon when there is a pullback in the SPX and my indicators show a positive change in direction. The maximum loss that can be sustained is the amount you paid (risk) for the butterfly. (Both a Call and/or a Put Butterfly can be traded equally as well).
As a side note: The big boys (algorithms, computer trades, etc.) are mostly fond of the 25, 50, 75 and 100 strike positions. Today those levels would have been the 5100, 5125, 5150 and the 5200.
At his point for tomorrow there is action at the 5140. A Butterfly centered on the 5150 is listed at .40 - .90 and probably could have been bought for somewhere in the mid-point. One of my favorites is to guess where the next Friday SPX will close. Maybe this Friday we might have a close at 5200. A 5200 5-point Butterfly can probably be bought for less than .25 and a 10 point spread 5190/5200/5210 for less than a dollar. These can be closed at any point you wish prior to expiration where there is an acceptable profit worth taking. A closing pin at 5200 would be worth $1,000 for a 10 point spread less the amount paid. I have paid as little as .!5 - .20 for one of these.
A happy note for traders who are limited in the number of day trades available. Since the SPX is cash settles you can leave the trade in place and it will automatically close at 4:00 p.m. and will not count as a day trade unless you close it yourself prior to closing (it then becomes a day trade). You would manage this trade as any other and close it out if the stars don't seem to be line in your direction
When I make a post like this it is usually listed as “Tutoring” which reminds me of an old Far Side Cartoon with a car backing out of the driveway and a large dog sticking his head out the window talking to the next door neighbor dog saying “Hey Biff, I’m going to get tutored!”
Hopefully my tutoring will provide for a more favorable outcome! Catching Butterflies can be both fun and rewarding!
What is an Options Butterfly?
An Options Butterfly consists of a Debit Spread combined with a Credit Spread. The body of the butterfly is comprised of the two short positions combined together (the body of the butterfly) while the two long positions, one on each side of the body are called the wings. The beauty of a butterfly trade is the low cost compared to the potential return if the trade pins near the body or ITM.
Any stock (ETF), that has options can be Butterfly traded. My favorite is the SPX Butterfly which is cash settled (meaning it can’t be closed against the trader – the trader is the only one who can close the trade and, if not closed, will become cash settled at expiration).
To buy a SPX butterfly you would place your pointer on the strike that you want to be the body (the two short positions) of the butterfly , right click on that strike go up to buy and then click on butterfly. This will open a 5 point SPX Butterfly Spread Trade. As I write this the SPX closed today at 5127.79. A five point Call 5125/5130/5135 spread would have been ITM (In-the-money) and returned $127.79 minus what you paid for the butterfly.
I like to trade the SPX 0DTE after 1 p.m. (as late as possible) in the afternoon when there is a pullback in the SPX and my indicators show a positive change in direction. The maximum loss that can be sustained is the amount you paid (risk) for the butterfly. (Both a Call and/or a Put Butterfly can be traded equally as well).
As a side note: The big boys (algorithms, computer trades, etc.) are mostly fond of the 25, 50, 75 and 100 strike positions. Today those levels would have been the 5100, 5125, 5150 and the 5200.
At his point for tomorrow there is action at the 5140. A Butterfly centered on the 5150 is listed at .40 - .90 and probably could have been bought for somewhere in the mid-point. One of my favorites is to guess where the next Friday SPX will close. Maybe this Friday we might have a close at 5200. A 5200 5-point Butterfly can probably be bought for less than .25 and a 10 point spread 5190/5200/5210 for less than a dollar. These can be closed at any point you wish prior to expiration where there is an acceptable profit worth taking. A closing pin at 5200 would be worth $1,000 for a 10 point spread less the amount paid. I have paid as little as .!5 - .20 for one of these.
A happy note for traders who are limited in the number of day trades available. Since the SPX is cash settles you can leave the trade in place and it will automatically close at 4:00 p.m. and will not count as a day trade unless you close it yourself prior to closing (it then becomes a day trade). You would manage this trade as any other and close it out if the stars don't seem to be line in your direction
When I make a post like this it is usually listed as “Tutoring” which reminds me of an old Far Side Cartoon with a car backing out of the driveway and a large dog sticking his head out the window talking to the next door neighbor dog saying “Hey Biff, I’m going to get tutored!”
Hopefully my tutoring will provide for a more favorable outcome! Catching Butterflies can be both fun and rewarding!
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