Butterfly Option
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Non directional trading enthusiasts will many times use the butterfly option strategy as a way take advantage of a stock or index or ETF that is caught in a chart range – or an underlying whose options provide good premiums but doesn’t gyrate wildly around.
Because the short strikes of these butterfly spread positions are usually sold ATM (at the money – or at the position on the chart where the stock or underlying asset is currently trading at) a large amount of premium – in fact largest amount that is possible – is collected at the start of the trade.
Again, option spread traders who use this option trading strategy will want to choose the underlying asset wisely – one which is either stuck in a price range or an underlying that doesn’t normally surprise, gap, or fly around on the chart. Many butterfly option traders prefer indexes or ETFs for these types of trade for this very reason.
As long as the the correct stock or index is chosen and the butterfly trade is placed, managed, and removed correctly – an individual can extract great monthly returns over time using this spread trading strategy.
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