Option Trading Strategy: Setup a Butterfly Spread
★ SUMMARY ★
Hey it’s Sasha Evdakov founder of Rise2Learn. In this video I want to share with you exactly behind What the Butterfly is when it comes to Trading Options and why you may want to trade the Butterfly.
The Butterfly’s just a fancy name for a type of spread because it looks like a butterfly. You can trade a butterfly to the upside you can't really tell downside or you can trade it to collect option premium butterfly’s a very effective strategy because it uses a lot less margin and which means a lot less risk to be able to trade those larger dollar value stocks.
First I want to share with you exactly what the butterfly is and what it looks like on a regular diagram and then I want to show you in the trading program and how to set up the butterfly.
Posted at: http://tradersfly.com/2014/05/option-trading-strategy-setup-butterfly-spread/
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if I have credit spread and now trade turns against me i.e sold CE 1 lot @ 150 premium & brought higher price CE @ 100 premium , now on expiry I will hv losses if it closes against me, in this situation can I convert the trade where at least I can get my money back by converting the same trade into butterfly ?
+AMOL GAWANDE it is difficult to say without looking at the premium, amount of time remaining, and many other variables and factors. Usually when you convert, adjust, or tweak positions usually take a slight hit initially in order to make up the difference in the profits later on or towards the end of the month so that way you can at least close out with a break even or a slight profitability on that side but this of course depends on the amount of risk you're looking to take on and how much Capital you're willing to put in when you make the tweak or adjustment
Hi Sasha, thanks for your informative videos. I have a question for you, I am trying to apply same Butterfly strategy to Swaption. Now, as per my understanding rate at the expiration of contract will behave same as strike price in Option. Can you please confirm if I am on the right track, if not please correct me.
sorry for not putting it in best way. I am trying to apply Butterfly strategy on Swaption, buying one call Swaption with low rate(lets say 5),Selling two Call Swaption @ fixed rate 5.50% and buying one call Swaption @6%. Now, in this case strike rate would be rate at the time of expiration i.e. floating and will behave in the same way the strike price behaves. so, the pay off will be based on spread and premium you pay for Swaption. Am I correct ?
Hi, Sasha, i have a question. lets assume the current price for apple is $100. with the butterfly spread strategy, you sell 2 call option at strike price @$100, and buy 1 at $90 and $110 respectively. my concern is, 1. if the stock price go beyond $110, there is only 1 call option @$110 to cover the loss. 2. why set up a call option at $90 strike price? How is it protect the account from losing money. Thanks in advance
Well you sold 2 contracts and you have one contract for the downside protection and one contract for the upside protection. (Sold 2 and bought 2 for protection).... of course the amount of movement will still create either a winning or losing position depending on the spreads, time value, price, etc...
another great video sasha thank you. few question 1) why do we get a credit when trading Iron butterflies? is the credit received from iron butterflies is better then the debit paid for it? thank you for your great work, keep the tutorials coming
Keep it simple.... You sell 2 contracts and you buy 2 for protection. The amount you sell is worth MORE than what you buy... hence the terms. If you sell 2 pairs of shoes for $400 and buy 2 pairs of pants for $50 - you still are $350 positive...
+Kurtie7 If you is interested in how to cash in on foreign exchange markets easily the greatest info that i've had was by using the Magic Monitor Blueprint (search google) without a doubt the most incredible site i've followed.
Sasha, after watching many option trading videos on you tube some of them on butterfly strategy your is probably one of the best; however, I could not find an answer to my question how far from the stock price would you want to put the short strike price? Is it one SD, 1/2 SD? what about the wings? how far it would make sense to put the break even points given the IV? what is your rule of thumb if I may ask. Regards, follower
+Perri Magnezi Hi Perry - depends... butterfly is just a strategy... it depends on the stock, the volatility, the market, etc. All these things will play a role. Comes down to managing your risk.
Sometimes they are wide, sometimes they are tighter.... Sometimes we will do 30 Pt wide butterflies and put them far out of the money 15 points up ahead of the stock... Other times we have one centered...
Unfortunately it is difficult to discuss this in a comment as a visual example would be better, but it is something you will have to play with after doing them month after month.
I saw the share price was at $604 at the beginning? how come at 10:15 none of these options were ITM or ATM for the butterfly spread? don't you have to Buy 1 ITM Call, Sell 2 ATM Calls, Buy 1 OTM Call?
+TheTraveler You don't have to... you can shift the butterfly more to the right or left depending if you are bullish or bearish... it is just another way to use the strategy... The strategy you mentioned is the way many teach beginners for setting up tbe butterfly, but you can shift the strategy more over if you want depending if you are more bullish or bearish...
I haven't seen any video where I can get information/clarification against every step. If I have to rank down the best videos of binary options you are gonna be second best after http://expertoptiontrading.com/oi/ . They are also describing each and every step for every possible outcome. Honestly, you people are doing great work. Thumbs up.
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