Our Nov 10 Skewed Butterfly trade gave us 12% this month. We love the ‘magic bows’ on these trades that can many times produce much better profits than even what our flat expiration line gives u at expiration. To learn more about these trades you can subscribe to our free newsletter

NOV ‘10 RUT SKEWED BUTTERFLY CLOSED FOR PROFIT is a post from: Butterfly Spread Trading Course

Technorati Tags: broken wing butterfly, Butterfly Spread, Credit Spread, Iron Condor, iron condors, skewed butterfly

Closed our Nov 10 Iron Condor Iron Butterfly Trade for just over 4% profit. To learn more about how to trade these particular trades join our new newsletter.

NOV ‘10 RUT IRON BUTTERFLY IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, iron condors, option strategies

After I placed the trade, I would just leave it be until expiration day where the options would expire worthless and disappear into option heaven.

Back then I believed this was the best way to play the trade, because not only would I not have to pay my broker to take the trades off – I would also be able to keep the entire amount.

But I don’t think this way anymore.

After a lot of sleepless nights, too many close calls, a couple of near ulcers, I’ve changed the way I run my Iron Condor business.

Now – as soon as I place the trade, I set a contingent order with my broker to buy back the call spread – as well as the put spread – once I’ve made the majority of the profit in each spread.

Here’s an example: Let’s say I sold an iron condor on the index XYZ for a total of one dollar – or around fifty cents each side.

After I place the trade, I would set up two contingent orders with my broker. One would be to buy back the upper half spread of the iron condor for ten cents – and the other to buy back the lower half spread of the condor for five or ten cents.

Now a lot of iron condor traders might say this would be a dumb thing to do.

But after trading these every month for years now – I don’t agree.

Okay, maybe it’s true that doing this will cause me to make less profit than if I were to just hold the trade through expiration and let the options expire worthless.

But not necessarily.

And also let’s look at exactly how much we are talking about here. The amount of money we’re talking about leaving on the table here is actually not that significant.

What is significant – at least to me – is that by taking off those positions, I’ve LOCKED IN the lions share of the profit available in the trade.

AND – my risk in the trade has been reduced.

I have also given myself the opportunity to generate ADDED gains from my overall position – without adding any extra risk.

Let me show you what I am talking about here:

A lot of times, the value in options will evaporate really quickly during a trade. I’ve actually seen options lose most of their value in just a few days.

Going back to our example – let’s pretend that I put an iron condor on about 40 days until expiration. For the trade I receive around a 1.00 credit. Fifty cents for each credit spread on either end of the position.

Then, as soon as I put the trade on, our underlying starts to move down and continues doing so for a couple trading sessions.

4 days after I put the trade on, I see that I can buy back my CALL side of the Iron Condor for.10.

Now, if I don’t do anything and just let the trade continue to play – what I am actually doing is risking that upper side spread margin – for the next thirty six days until expiration – for just ten little dollars of additional potential profit. And that doesn’t really seem that worth it to me.

But – if I instead just spend the ten measly bucks to pull off that upper credit spread – I will LOCK IN the majority of the profit that was available in that spread – and earn a great return on investment in just four days.

Then, if XYZ bounces back up – which it will often do after a drop – I no longer have any risk on the upside.

And – for icing on the cake – if it DOES head back up we have the opportunity to ‘resell’ those identical credit spreads – the same ones we just bought back for ten cents – for potentially the same amount of credit we originally sold them for – or perhaps even more. Doing this it’s possible to wind up with an even greater ROI then were were hoping for when we first initialized the iron condor trade.

But let’s just say we didn’t ‘re sell’ any options. Let’s just assume that we closed the trade entirely when our contingent orders were hit. In this case what we’ve done is eliminated risk (good thing) – freed up capital (good thing) – enlarged our return on investment over the number of days we have been in the trade (good thing) – and gotten completely out of the market a while lot sooner than if we had to sit around and wait until expiration day rolls around (and in my opinion this is a good thing too!).

Trading this way lets me take a ‘vacation’ away from the markets until it’s time to put on another trade. It allows me to peel myself away from my trading monitor and get out and enjoy all the other things in my life I’m interested in – without always thinking about how my iron condor is performing – or fretting about what I’ll do if there is a sudden stock market crash.

And for me, being able to have that monthly ‘window of time’ away from the markets – that ‘break’ where I can completely clear my head and forget all about ‘options’, and ‘strike prices’ and ‘standard deviations’ and ‘deltas’ – being able to just get away from the computer and go out and do other things without having that little constant nagging ‘I have a current live trade on’ stress and worry – being able to go to bed at night without an ‘option trading care in the world’ and quickly fall into a thick, deep, snoring sleep – sound as a baby…

These things are priceless.

Or at the very least they are WITHOUT A DOUBT worth every penny of the ridiculously small .20 cents or so of potential profit left on the table in exchange for getting out of my monthly iron condor trade early – at what is STILL an incredible monthly return.

Iron Condor – Getting My Life Back is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, iron condors, Vertical Spread, weekly option, weekly options

OEX Butterfly closed for profit. We ran this butterfly up to expiration as the the OEX was trading right near our short strikes. Stay tuned as shortly we will start to post our results for the J Trade going back to January

AUG ‘10 OEX BUTTERFLY SPREAD – CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: broken wing butterfly, Butterfly Option, Butterfly Spread, Credit Spread, iron butterfly, Iron Condor

See various risk graphs below….

Our position right before starting to close it out

Unwinding position. A guaranteed profit is locked in here, with more future profit possible if RUT makes a significant move either way

Trade initially placed with RUT trading around 658. Trade taken off with RUT trading at 590

July ’10 Butterfly Spread – Iron Condor #2 Closed is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, credit spreads, Iron Condor, iron condors, Vertical Spread, vertical spreads

ABOVE: Left on one of our extra long calls as lottery ticket.
Our profit goal is locked in.

Closed out our July Butterfly / Iron Condor for just under 9% profit.

July ’10 Butterfly Spread – Iron Condor Closed is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors

Our July Iron Condor / Butterfly Spread is off and running. So far so good as we have a profit already and have our ‘ whipsaw curbs’ in place while retaining a good theta. Stay tuned…

July ‘10 RUT BUTTERFLY SPREAD – IRON CONDOR OPENED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, iron butterfly, Iron Condor, iron condors

Above: Initial Position at Open

Above: Starting to unwind position. We held this position for about an
hour while trying to get a ‘better than quoted’ fill. Once again, fills were
difficult today. Trades that are usually very easily filled at the mid simply
won’t go and it takes quite a bit of time to finally get a decent fill.

Above: Majority of position removed.

JUNE ‘10 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors

June RUT Butterfly Spread

This is our 3rd Butterfly Spread we’ve traded this month. Even with this very volatile month because of our new ‘flex’ adjustments we’ve been able to bring in a profit on each one. This trade is just now starting to show a profit and we expect (knock on wood) to close this out profitably early next week.

Iron Condor – Butterfly Spread – Current June Butterfly Trade is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor, iron condors

Taken at 11:40 AM

A couple hours before the big drop, we put on a simple put adjustment due to our position hitting some greek criteria. When the crash happened, that cheap little way out of the money put quickly blew our position (which was showing a loss of around -2.5% at the beginning of the day) into a profitable position of over +20% as the market fell out of bed.

Above and below see some risk graph screenshots that were taken of this position as the market was going down…

Taken at 12:09 PM

Iron Condor Butterfly Magic Put Adjustment is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors

April 2010 Expiration

This months Butterfly Spread Trade was another pretty much ‘perfect’ trade. Very little management was required – lazy trading at it’s finest. Opened this trade on 3-21-10 – closed it on 3-29-10 – for an open trade duration of just 9 days.

APRIL ‘10 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condor spread, iron condors, Vertical Spread

When you look at a risk graph of the butterfly spread, you can see that the butterfly payoff is tremendous – especially when compared to other option income spread strategies such as the iron condor, the credit spread, the diagonal, double diagonal, the calendar, double calendar, etc.

Depending on where the wings are placed on these trades (how close or far they are purchased in relation to the strikes sold) it is possible to create a butterfly trade where the possible reward is many times the risk taken on.

However, in the instances where the reward is so many times greater than the risk, the wings are purchased very close to the sold strikes, creating a very tall yet extremely  narrow ‘profit tent’ which the underlying needs to stay within in order to realize that huge payoff – which the odds will be very low.

Even so, if the underlying stays within the general vicinity of this tall, narrow profit tent – and the trader doesn’t plan to stay with the trade all the way until expriation day – a good profit can still be taken from these lower probability butterflies as the 0 day profit line rises up quite quickly and a decent return can be grabbed within a short amount of time.

OPTION INCOME VIDEO COURSE – CLICK HERE

photo credit: timomcd

Butterfly Payoff is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, butterfly payoff, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor, iron condors, Vertical Spread

Our April ’10 Butterfly Spread is off and running…

APRIL ’10 RUT BUTTERFLY SPREAD – IRON CONDOR OPENED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor

Butterfly Option Spreads are one of the most ‘robust’ option trades of the ‘main’ option spread income strategies. In other words, the butterfly spread can withstand more ‘abuse’ from a volatile market than say the iron condor, diagonal, or calendar, – and still come out smelling like a rose.

One reason for this has to do with the amount of premium brought in at the start of the trade. Because in most cases the short strikes of the buttterfly strategy are sold ATM (at the money) an extremely large amount of ‘premium’ is brought into the account – which can help to fund future trading tweaks and  adjust ments if / when neccesary.

Also – if you look at the risk graph – or payout diagram – of the butterfly spread, you can see that the 0 day line (the line representation on the graph which represents what the current value of the position is) is really forgiving in either direction. The slope of this line on the graph is much flatter over much longer of an area than say the iron condor.

In a wild market, I’ve found the butterfly spread much more tolerable and also easier to adjust – again, partially due to the fact that I have so much premium to work with in ‘purchaing’ additional insurance – where, say with the higher probability iron condors, there really is only so much premium to work with while adjusting – and a trader needs to much more careful and precise while managing.

photo credit: Ajith

Butterfly Option Spreads is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, butterfly option spreads, Butterfly Spread, Credit Spread, Iron Condor, iron condors, vertical spreads

The vertical spread is basic building block of the butterfly spread. In fact, the vertical spread – either in the form of a credit spread or a debit spread is a basic building block of most option spread strategies.

In the case of the butterfly spread, this option trade can be created out of a debit spread and a credit spread within the same trade – or – it can be constructed from just credit spreads alone – much like the way an iron condor trade is set up.

And actually – technically – the iron butterfly spread IS an iron condor. The only difference being that with the more traditional iron condor the short strikes are not sold at the same strike – or even near each strike. They are sold a good distance apart.

With the iron butterfly butterfly trade however, the two vertical spreads (one put bull put credit spread and one bear call credit spread) are sold joined together with the same short strikes being sold. The wings of this trade our purchased at a distance away from the sold short strike.

On the other hand – a traditional butterfly spread is created using two vertical spreads made up of all call options or puts. One vertical spread within the traditional butterfly spread is a debit spread – while the other is a credit spread. Like the iron butterfly – the shorts that are sold are done so at the same strike – the difference between the to option spread strategies is one is made up of both calls and puts – while the other is solely constructed from all calls – or all puts.

photo credit: Patrick Hoesly

Vertical Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors, Vertical Spread

The butterfly spread is a delta neutral theta positive options trade that performs ideally when used on a stock or index that is range bound or not moving wildly all over the place.

The traditional butterfly strategy is built from two separate option spread strategies: the debit spread and the credit spread – and is composed of either entirely calls or entirely puts.

These two separate spreads (the debit spread and the credit spread) are joined together at each individual spreads ‘short strike’. The ‘wings’ of the butterfly spread strategy are traditionally spread an equal distance apart.

An example of this option spread trading -

Purchase 11 Call Options @ the 200 strike point
Sell 22 Call Options @ the 220 strike point
Purchase 11 Call Options @ the 240 strike point

This above represents a traditional call option butterfly. This trade can also be built from entirely puts as well – or – both calls and puts which would then be called an ‘iron butterfly’ (much like an iron condor just collapsed together and with wider spread wings).

The butterfly trading technique makes its profits from the decaying theta of the options – and performs its best when the trading vehicle being used remains within the ‘profit tent’ of the butterfly position.

If the underlying asset being used moves beyond the breakeven levels of the profit tent – the trader would then need to either exit the trade or adjust.

photo credit: SearchNetMedia

Butterfly Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors, Option Selling, Vertical Spread

The butterfly strategy is one of the most robust and versatile option selling techniques available.

In a lazy, quiet market condition there is very little – if anything – to do to manage these positions – other than watch your 0 day risk graph line rise up as your account grows – then close it out to collect your ‘trading paycheck’ at the end of the expiration cycle.

However, this is the case with basically all your standard theta positive monthly income type option strategies – like the iron condor, the calendar and double calendar – the double diagonal, etc.

What sets the butterfly strategy apart from the others is how this spread performs during extreme market conditions.

Ever since the crash in late 2008 delta neutral theta positive monthly income option trading has been a challenging endeavor. Yes, all the basic trades can and have worked – however during many of the months there is more work, adjustments, annoyance, and more stress involved then in past more peaceful times.

Out of all of the strategies – and I’ve traded them all through this period – the butterfly spread trade is the one that is the most robust – most consistent – most reliable – and the one that has given me the least amount of trouble and the most amount of profits.

And even though I do love condors – and I do love double calendars – and double diagonals… well – let’s talk about those later…

Anyway – if a low down dirty thug walked into my trading room one day and forced me at gunpoint to pick just ONE strategy I was allowed to trade for the rest of my life – it would have to be the butterfly spread.

I love you butterfly spread.

Where’s a tissue…

photo credit: mononukleoza

Butterfly Strategy is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly strategy, Credit Spread, Iron Condor, Option Selling, Vertical Spread

is a post from: Butterfly Spread Trading Course

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.

photo credit: SearchNetMedia

Butterfly Option is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors, Vertical Spread

Butterfly Spread Trades can be composed of all call options, all put options, or both call and put options.

Regardless of how they are constructed – for the most part they appear the same in a trading platform risk graph pay off diagram window – and also for the most part they perform the same while the trade is on.

There are instances where exiting the butterfly call spread trade can become somewhat of an issue when using an ‘all call option’ butterfly – or an ‘all put option’ butterfly.

This usually has to do with situations where the debit spread side of the trade becomes so far ‘in the money’ that it can be difficult to get a nice fill on those in the money option / spread when trying to exit the trade.

One way that this situation can be dealt with is to create a ‘box’ on the trade – which is buying and selling the exact opposite options that are so deep in the money. The exact opposite side of the trade will be out of the money and should be much easier to fill – and when done can ‘lock in’ the profit on that part of the trade.

photo credit: jontintinjordan

Butterfly Call Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: butterfly call spread, Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condor spread, iron condors, Option Selling, option spread trading, Vertical Spread

“Just when you think you are smart, the market will show you just how really dumb you are.”  – Louis Navellier

“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.” – William Bernstein

Butterfly Spread – Trading Quotes is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor

March 2010 Expiration

Our Butterfly Spread Trade this month did beautifully. Opened this trade on 2-17-10. Closed it on 2-25-10 for a profit of just over 10% in 8 days.

MARCH ’10 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor

photo credit: dno1967

What is a butterfly spread trade.

A butterfly spread is an options spread trade that takes advantage of the fact that options are decaying assets.

Butterfly spread traders SELL the options that have the MOST time premium – or the options that the MOST ‘fake’ or ‘unreal’ value.

As long as the underlying they are trading stays within a range – which the probabilities say they should – the trader should be able to ‘capture’ a large percentage of the TIME value as it disappears into ‘thin air’ – as time goes by.

The closer the trade gets to expiration day – the options will decay at a faster and faster rate.

And the butterfly trader only needs a small fraction of the premium he or she originally brought in by selling the at the money options to realize a very good return on investment.

And what happens if things don’t go so well – and the underlying doesn’t stay within the ideal range?

The trader is then able to utilize the huge amount of premium he or she brought into the trade by selling the At The Money options to ‘fund’ a number of different available adjustment techniques to keep the trade profitable.

What Is a Butterfly Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, butterfly options, Butterfly Spread, Credit Spread, Iron Condor, what is a butterfly spread

photo credit: dno1967

Traditionally traders might consider the Butterfly Spread to be a ‘neutral’ strategy – one that is used when the trader believes that the underlying being used will not move much and will remain in a relatively narrow range.

And while of course butterfly spreads do work – and work wonderfully – in such situations, butterflies can also be used if the trader believes the underlying will be making a directional move.

The thing with butterfly spreads is that you want to place the short strikes of the trade either at or as near as possible to where the underlying will be trading at expiration day. That is how and where the money is made in these trades.

So, if a trader had a directional bias on a particular underlying – and thought that it would rise up to a certain price within the time period to expiration – that trader could place a butterfly as a bullish spread.

To do so the trader would place an OTM (out of the money) butterfly trade with the short strikes sold at or near the strike price where the trader believed the underlying would be at expiration.

If the trader wanted to give himself more ‘room to be wrong’ he could place a wider butterfly – with the wings being further away from the sold short strikes – allowing his ‘profit tent’ to encompass a wider area of profitability around the sold short strikes.

If the trader had a crystal ball and was certain the underlying would wind up at a specific strike price at expiration day – he would want to sell a narrow butterfly trade – with the wings being as close to the sold strikes as possible – which would give him an enormous profit with very little risk in the trade – as long as of course, his crystal ball was right.

Bullish Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: bullish spread, Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor

photo credit: timlewisnm

When trying to understand a more complex options strategy, many times I find it easier to ‘reverse engineer’ the position, break it apart into pieces -understand what exactly those pieces are that make up the trade, then put them all back together again.

For example, an alternate way to look at the Iron Butterfly Spread is break the position apart and realize that this trade is actually just the Sale of a Straddle.

For example, the original iron butterfly position might look something like this:

Buy 1 35 Put
Sell 1 40 Put
Sell 1 40 Call
Buy 1 45 Call

However, when we break it apart, we could say that this trade is simply a butterfly straddle – or a sale of a straddle…

Sell 1 40 Straddle

and the purchase of a strangle…

Buy 1 35/45 strangle.

The sale of the 40 straddle is what the trader is utilizing to bring in the income.

The purchase of the 35/45 strangle is used as protective wings.

Butterfly Straddle is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly straddle, Credit Spread, Iron Condor

photo credit: dev null

There a several different types of butterfly spreads traders can put on.

Traditionally there is the call butterfly and the put butterfly. The call butterfly is constructed from ONLY call options – while the put butterfly is constructed from ONLY put options.

An example of a call butterfly would be:

Buy 1 25 Call
Sell 2 30 Calls
Buy 1 35 Call

A put butterfly spread example might be:

Buy 1 60 Put
Sell 2 65 Puts
Buy 1 70 Put

Then there is the Iron Butterfly, with is made up from both calls and puts. One way to think of this butterfly spread is as an Iron Condor with the short strikes of either side being sold at the same strike price – or ‘glued’ together.

An example of an Iron Butterfly could look as follows:

Buy 1 45 Put
Sell 1 50 Put
Sell 1 50 Call
Buy 1 55 Call

Then there is the ‘Skewed Butterfly’ or the Broken Wing Butterfly.  In the above examples, the butterfly spreads shown had wings that were bought an equal distance away from the short strikes on either side. In the case of the Skewed or Broken Wing Butterfly this distance is not equal.

An example of a Skewed or Broken Wing Butterfly could looks as follows:

Buy 1 50 Call
Sell 3 55 Calls
Buy 1 65 Call

Butterfly Spread Example is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly spread example, Credit Spread, Iron Condor

photo credit: Anne Toal

The Iron Butterfly Spread is actually an Iron Condor. Even when in my option trading software platform – when selecting from their ‘trading strategies’ to place – when wanting to select an Iron Butterfly – it’s not one of their options. You must select ‘Iron Condor’ instead.

However, the payoff diagram of an Iron Butterfly looks just like the payoff diagram of a regular butterfly – and for the most part they act the same during the duration of the trade.

While a regular butterfly spread is made up of only calls or only puts – the iron butterfly spread is made up of both calls and puts – just like an iron condor spread. However unlike a traditional iron condor spread where the short strikes of the trade are placed some distance apart from each other – with the Iron Butterfly Spread – the shorts are sold at the SAME strike.

An example of an Iron Butterfly might look as follows:

Buy 1 50 Put
Sell 1 55 Put
Sell 1 55 Call
Buy 1 60 Call

Another way to think of the iron butterfly spread is to break the two halves of the spread apart. When you do, you can find that the iron butterfly is simply two vertical spreads – or credit spreads. A 55/50 Put Credit Spread and a 55 / 60 Call Credit Spread – with the short strikes of the two spread ‘glued’ together at the middle.

Iron Butterfly Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, iron butterfly spread, Iron Condor

photo credit: centralasian

I’ve spent a ton of money on various option trading course over the years. Some good – some bad – but what I’ve found surprising is how almost ALL of them deliver only text book type information on ‘what is an option’ or ‘what is a butterfly spread’ or ‘what do the Option Greeks mean’, or ‘how do you navigate this trading software’ ect.

I have walked away from MOST of them with very little to NO practical knowledge whatsoever on HOW to actually trade options – HOW to successfully make money consistently trading options.

I’ve often wondered why that is.

And some of these courses weren’t just put out by mom and pop shops either. Some of these courses were taught by well known option market makers and high level traders who really DO know how to pull money consistently from the markets. So why don’t they – or ‘can’t’ they pass that information on to their students?

And again, these weren’t cheap courses either. Thousands of dollars were spent.

In any case – occasionally here and there I have found gems – programs that delivered knowledge that I could turn around right away, apply to my trading, and immediately see results.

Shortly I’ll put together a list here of the few that I have found, that, in my opinion are worth their weight in gold. So stay tuned…

Option Trading Course is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, option trading course

photo credit: divemasterking2000

A great way for spread traders to get ‘hands on’ experience trading butterfly spreads, credit spreads, and iron condors – without being exposed to the risk – is to ‘paper trade’ them first.

Any option trading strategy – or any trading strategy for that matter – can act quite differently than one might expect when first just reading or learning about it in a book, video, or training course.

Think of it like a flight simulator. You want to learn how to fly a plane – so you read a book, take a class – but just reading or learning about it from a class certainly doesn’t mean you’re ready to climb into a plane and take off. It would be recommended (or at least should be recommended) that after your ‘book’ study – you climb into a flight simulator so you can get an idea of what it’s really like to fly – without risking your own life – or anyone else.

We should approach our trading the same way. Climb into a ‘trading simulator’ and put these trades on – watch them – manage them – and see how they act and perform. This information is priceless in our trading training – and we are able to really soak it in and learn without having the stress of worrying about losing real money.

Many option trading software platforms have ‘paper trading’ capabilities – and many of these are free option trading software. Recommended is to check out ThinkorSwim.com which provides a great paper trading software platform that looks and acts just like their live trading platform.

Free Option Trading Software is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Credit Spread, free option trading software, Iron Condor

On some software – like the ThinkorSwim.com option trading software platform – there may even be a colored vertical line that ‘highlights’ this area on the graph.

This area is important – especially for this breakeven spread – because it is the point at which if / when the underlying moves through on either side – the position is really no longer ‘under the tent’ – or no longer within  the price range it needs to be in at expiration to be profitable.

These breakeven levels are significant when trading these option positions – and many traders use these ‘levels’ as a ‘signal’ to take some sort of management action – like adjust. They use the spread’s ‘breakeven’ marks as their ‘cue’ that the position in now in danger – and something must be done to widen or move the tent to keep the underlyings current price contained in an effort to keep the option position profitable.

Breakeven Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: breakeven spread, Butterfly Option, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor

photo credit: 【Ｊ】

A Reverse Butterfly Spread is a butterfly trade that can actually stop time in it’s tracks – then turn it on it’s heels and push it back – causing not only the stock market – but the entire world – to actually start ticking backwards.

This can be useful in a number of different ways. Say there was a sudden big move in the market forcing you to make an adjustment on a trade – only to have the market just as suddenly turn back around and take off in the opposite direction.

Well, playing the reverse butterfly spread – you could simply ride it back in time to when you made that unnecessary adjustment – and just not make it.

Pretty impressive right? Hey, I know. You don’t have to tell me – you’re preaching to the choir. For several years now I’ve been shouting from the roof tops how amazing and versatile these butterfly spread trades are…

Oh, all right.

I’ll get into what a Reverse Butterfly Spread Trade ‘really’ is next time.

Reverse Butterfly Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor, reverse butterfly spread

photo credit: gentlebird

When some option traders look at the risk graph of a butterfly – or the butterfly spread payoff diagram – they can’t understand why anyone would want to trade these things.

When you look at a risk graph representation of the butterfly trade – it can look improbable that the underlying will remain within the profit range that is provided. If you have ever seen one – the payoff diagram resembles somewhat of a narrow triangle – or an Indian tepee. The range that resides ABOVE the zero – or break even line – is actually quite narrow – especially when compared to the huge width of a higher probability Iron Condor.

While admittedly the range is narrow – and the probabilites can be quite high that the underlying will break through one of the two sides of the initial risk graph – there are things about the butterfly that more than compensate.

For one – if the underlying DOES stay with in the range – which it certainly can – the profits one can take out of a butterfly is HUGE compared to what can be taken out of a higher probability condor. 20, 30, even 40 percent is not unheard of.

Another thing is that the profits can be realized much faster in a butterfly trade because of the way they are constructed with that narrower width.

Third – the amount of premium that a butterfly trade holds in that ‘tepee’ can become very useful in funding the management and adjustments of the trade if it’s needed – allowing a butterfly trader to potentially stay in a trade much much longer than an iron condor might be able to with limited built into the trade resources to ‘weather’ a wild market storm.

Butterfly Spread Payoff Diagram is a post from: Butterfly Spread Trading Course

Technorati Tags: butterfly options, Butterfly Spread, butterfly spread payoff diagram, butterfly trade, Credit Spread, Iron Condor

photo credit: BozDoz

The short strikes of the butterfly spread are usually sold ATM (at the money). Strikes that are at the money have the most ‘Time Premium’. Time premium is what will erode away making the butterfly spread trader / option seller money.

Butterfly spreads are 3 legged trades. Again, the short strikes are sold at the money – and the wings are purchased in equal distance apart from the shorts. One could think of the butterfly spread as the sale of a straddle – with a strangle purchased around it.

Sometimes, if the underlying isn’t sitting exactly at a strike price at the time a butterfly trade is placed, the trader could place a ‘split strike’ butterfly – where the short legs of the trade are sold at two strikes next to each other – or very near each other.

For example, lets say that a trader wishes to place a trade on SPX when SPX is trading at 997.

Because SPX is trading almost exactly between the only available strikes (995 and 1000) it might make more sense to the trader to place a split strike butterfly to help in keeping closer to delta nuetral.

A split butterfly strike in this example would look something like this:

Buy 1 990 call
Sell 1 995 call
Sell 1 1000 call
Buy 1 1005 call

Butterfly Strike is a post from: Butterfly Spread Trading Course

Technorati Tags: butterfly options, Butterfly Spread, butterfly strike, butterfly trade, Credit Spread, Iron Condor

photo credit: Arbron

If you took the shorts away from a butterfly spread you’d be left with a strangle spread.

I think a lot of butterfly spread traders would love to be able to trade their butterflies without the wings – or the strangle. Having to buy the wings cut into the total profit potential. It also weighs down the trade, causing it to take longer to reach the profit target.

But many brokers won’t allow it – for margin reasons as without wings there is technically unlimited loss in the trade. Which is also the reason why I guess we need those wings – to protect again the possible – the unforeseen – no matter how remote it may be.

Having the wings limits the total loss that is possible in the trade. They can also assist in the adjusting and management of a trade. After trading these for awhile and becoming comfortable and accustomed to adjusting – a butterfly spread trader can use the wings as quite a versatile ‘tool’ in tweaking and tuning in a trade – not only to hedge against a big move that would cause losses – but also in prying and pushing out profits from the position.

Strangle Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor, strangle spread

photo credit: Nick.Fisher

While changes in volatility will have an effect on butterfly positions – I’ve found that they are always less severe than they are say in a strategy like the calendar or double calendar spread.

With butterflies (as well as iron condors) a decrease in volatility will help your position – while an increase in volatility hurts it. However – while an increase in volatility can have a negative impact on your current profit and loss in a butterfly position – it doesn’t have an effect on your FINAL profit potential – your ‘Expiration Line’ on your option risk graph – so while you’re in a trade if the going gets rough and vols spike up – you can always feel confident that the profit potential that’s showing in your ‘profit tent’ is ‘real’ and if you can just successfully manage your way through the move that is occurring it’s yours for the eventually taking.

On the other hand – with a strategy like the calendar spread – or double calendar – changes in volatility can have a drastic – and even damaging effect. The ‘total profit potential tent’ you see on the risk graph at the inception of a calendar trade isn’t at all what you can always count on getting – as changes in volatility can raise and lower that tent dramatically – possibly putting your position suddenly way under water – leaving you with very little you can do to fix it.

Butterfly Volatility is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly trade, butterfly volatility, calendar spread, Credit Spread, double calendar, Iron Condor

photo credit: wka

Having traded a wide variety of different option strategies – if not all of them (at least the ones that I’m aware of) – I’ve found butterfly spread trading to be the most consistent, the most enjoyable, the most manageable, and the most profitable of them all.

The thing with butterflies is that when they are sold at the money – you are bringing in a large amount of premium which becomes your ‘premium bank’ for which will give you your final profit – AND – be there for you to draw from to fund your adjustments through out the duration of the trade.

A trade like the Iron Condor – at least the ‘wider’ condors – will have so little premium built into the position that a trader is really limited in the number of adjustments that can be made without depleting the condors ‘premium bank’.

On the other hand – the butterfly – because you are selling the at the money options that hold the MOST amount of premium possible – you’re ‘premium bank’ for funding adjustments is almost always more than adequate – with plenty left over to become your profit from the trade.

Butterfly Spread Trading is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly spread trading, butterfly trade, Credit Spread, Iron Condor

photo credit: Alexandre Hamada Possi

There are a number of different ways a trader can construct a Butterfly Spread.

The traditional Butterfly Spread is made up of either all calls or all puts. The short strikes are sold At The Money – while the long calls – or ‘wings’ – are bought an equal distance away from the short strikes on either side.

For example, a Butterfly Spread with puts might look something like this:

Purchase 1 60 put
Sell 2 65 puts
Purchase 1 70 put

An example of a call Butterfly Spread might look something like this:

Purchase 1 60 call
Sell 2 65 calls
Purchase 1 70 call

An Iron Butterfly is a butterfly spread made up of both calls and puts. Think of an Iron Butterfly as an Iron Condor – only with the short strikes which are sold at the money  touching each other (or being the same strike). For example:

Purchase 1 60 put
Sell 1 65 put
Sell 1 65 call
Purchase 1 70 call

Also see http://www.ironcondor.net

Butterfly Spread With Puts is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly spread with puts, butterfly trade, Credit Spread, Iron Condor

February 2010 Expiration

Our Butterfly held up well this month considering the big fast down move we had which started on the same day we put this on. Would have liked to milk more out of this trade, but with the market starting to act a little batty decided to just take the money and run.

FEB ’10 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

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JAN ’09 SPX BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

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Jan ’09 IRON CONDOR – CLOSED is a post from: Butterfly Spread Trading Course

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Jan ’09 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

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DEC ’09 RUT Butterfly Spread – Iron Condor Closed is a post from: Butterfly Spread Trading Course

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DEC ’09 SPY Butterfly Spread – Iron Condor Closed is a post from: Butterfly Spread Trading Course

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DEC ’09 SPY Butterfly Spread – Possible Adjustments is a post from: Butterfly Spread Trading Course

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October 09 Expiration

OCTOBER RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

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September 09 Expiration

SEPT. ’09 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

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8-10-09 (above)

Risk graph above shows position after numerous adjustments and heading into final week before expiration…

8-12-09 (above)

Closed this RUT Butterfly with small profit – letting the contracts in graph directly above expire worthless. The move in the market this month gave us a run for our money and happy to get out with the little we wound up with.

AUGUST ’09 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, Option Trading Strategy

8-3-09 (above)

8-17-09 (above)

8-17-09 (above)

8-19-09 (above)

Due to the quick big move in the market this month, this trade also required a lot of adjusting. We rode this trade longer than we normally do – until the Wed. before expiration. Risk graphs from trade / adjustments above…

AUGUST ’09 SPY BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Credit Spread, Iron Condor, option trading strategies

Risk Graph directly above is of trade right before closing.

This Risk Graph (directly above) is of trade shortly after initiating the position.

The current market climate has been perfect for trading these butterfly spread trades – and even though we have had to adjust, it has been minimal and actually even enjoyable. Much different way of trading butterflies compared to late last year.

JULY ’09 SPY BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, credit spreads, Iron Condor, option trading strategies

6-24-09

This months butterfly spread trade was short and sweet – just 8 days in the trade. Fairly straightforward and there was nothing too new or out of the ordinary while managing this. The market has been cooperating nicely for these butterfly trades as well as our iron condors.

JULY ’09 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option trading strategies

6-15-09

6-15-09

This months Spy Butterfly did nicely. On closure of main position left some extra OTM long calls on since they were worth less than what it would have cost in commissions to close them – AND – if the market blasts off for some reason before expiration day they could become a nice little lottery ticket.

JUNE ’09 SPY BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option trading strategies

Squeaked out a tiny profit on this June IBM Butterfly. It’s been so long since trading IBM Butterflies (last fall) it somehow slipped the mind to take into account the difficulty in adjusting with only 5 point wide strikes with little time left until expiration (compared to the indexes where there is a strike at every point). On this trade utilized next month out (July) put credit spreads to keep theta in check while adjusting with the idea being could always just keep them if need be as part of a July Butterfly. However, in end closed out entire trade with small gain – leaving on far out of the money long calls as ‘lottery tickets’ because they were worth less than what it would have cost in commissions to close them out.

JUNE ’09 IBM BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option trading strategies

This Butterfly Spread Trade was up over 10% until the big move on 6/1 forcing us to adjust. In hindsight we probably should have taken it off the last friday in May while we were up and the going was good – but then again – who knew. In any case, this return in 23 days certainly isn’t anything to complain about. Above is risk graph of the trade right before we took it off.

JUNE ’09 RUT BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option trading strategies

5-14-09

This month we used a strategy called ‘Theta Scalping‘ to adjust our SPY Butterfly Spread trade. This adjustment strategy involves using the underlying STOCK in conjunction with the trade to adjust the position instead of using just the options.

This month, when SPY first shot up, we did our first round of adjustments using only SPY options like we usually do. However after the first round was complete, we then switched and rode out the rest of the trade adjusting with SPY stock.

What’s interesting about adjusting using the stock is that the trades theta DOESN’T decrease like it does when using options to adjust. When using options, the theta of the trade can get cut down causing the trade to make less through time decay. Using the stock to adjust, we were always able to get back towards delta neutral without any real decrease in theta.

This way of adjusting can be used with iron condors and calendar spreads as well.

Below is a screen grab of this trade about a week after it was first initiated and a day or two before SPY shot up causing us to make or first round of adjustments (around 5-1-09)…

5-1-09

MAY ’09 SPY BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option trading strategies

DIA OBDB BUTTERFLY SPREAD – Risk Graph above on close of trade – 5/14/09

DIA OBDB BUTTERFLY SPREAD – Risk Graph above on 5/2/09…

DIA OBDB BUTTERFLY SPREAD – Risk Graph above on 4/25/09

We started this Butterfly Spread Trade off as a Double Butterfly. The move up from around 78 to 85 forced an adjustment. We eventually exited in expiration week with a profit.

MAY ’09 DIA BUTTERFLY SPREAD – IRON CONDOR CLOSED is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option strategies

The butterfly spread is a positive theta trade – meaning that this trade makes money from the decay of the options in the positions over the passage of time.

Butterfly options traders will utilize the butterfly strategy when they believe the underlying will stay within a range – or they have an opinion where the underlying will be on the price chart on expiration day.The butterfly trade makes its money when the underlying stays or winds up at the short strikes of the position on expiration day. Ideally a butterfly spread trader wants the underlying to stay within a range determined by where the bull spread and bear spread where bought or sold.

An example of an option butterfly spread is as follows: – Example underlying: SPY. Buy 1 80 call. Sell 2 85 calls. Buy 1 90 call. It is also possible to create a butterfly position of both calls and puts (rather than a butterfly position made up of only calls or only puts.) For example – a butterfly on the ETF SPY could be made up of the following strikes:Buy 1 80 put. Sell 1 85 put. Sell 1 85 call. Buy 1 90 call.

Another reason option traders particularly like butterfly spreads is because of the amount of premium that is brought into the trade. Because the sold strikes of these trades are usually sold at the money – butterfly traders are bringing in the max amount of premium possible – and this in turn can provide a higher return on investment than other similar option strategies. It also allows the trader more flexibility in making adjustments.

The butterfly strategy is a favorite trade of option traders and is used by many professional traders as well as retail traders who are ‘in the know’ to generate consistent monthly income. Many times option traders prefer these trades over other popular income trades because they could be viewed as a superior strategy. For example, when compared to the iron condor trade – butterfly spreads can be easier to manage and adjust. When compared to the calendar spread – a trader knows for certain what they can wind up with profit wise regardless of what happens to volatility levels.

Butterfly Spread is a post from: Butterfly Spread Trading Course

Technorati Tags: Butterfly Spread, Iron Condor, option trading strategies