By Ted Nino
A great system for option traders who feel the underlying instrument they’re working with will probably be range bound for the next 2, 3, or 4 weeks of time or so is the butterfly spread .
This strategy is a theta positive trade as it generates income from the passage of time as the option that are sold in the position decay over time. As long as the underlying vehicle doesn’t move too far in either direction or just as long as the price of the underlying winds up at or near the sold strikes of the position on expiration day, this trade will profit.
Here is an illustration of this tactic:
Buy 5 contracts of SPY 100 calls. Sell 10 contracts of SPY 105 calls. Purchase 5 contracts of SPY 110 calls.
These trades can generate quick gains for the investor as a result of the short strikes in the position (the strikes that have been sold) providing so much premium into the traders account. This is because the strikes that are usually sold in these trades are the ‘at the money’ strikes – or the strikes that reside closest to where the underlying is actually trading at when the trade is first put on. The ‘at the money’ strikes always contain the most amount of time premium, which is what option traders are looking to benefit from when trading these type of income positions.
While there are numerous variations of the butterfly strategy, the two most common are the regular butterfly spread which are put on for a debit, and the iron butterfly, which is placed for a credit. While these are two different versions of the butterfly spread, if you were to look at the risk graphs of each they look identical and or the most part they act act identical as well. With both versions of this strategy, it is the sold strikes that deliver profits to the trader as those short options decay in value over time.
The butterfly spread is neutral strategy. It is a method of trading without having to choose market direction. These trades can produce significant profits as long as the market or the stock being traded stays within somewhat of a range, or as long as the trader properly manages the position if and when a large unexpected move does occur.
With the proper knowledge, the butterfly spread can be a lucrative, low pressure, and pleasant investing system that doesn’t require one to be glued to their computer screen stressing out over every tick of the market all day.
To find out more about this strategy, visit this Butterfly Spread Training Website for tons of free training videos, examples, and reports on how to correctly enter, exit, manage and adjust the Butterfly Spread to generate a consistent monthly income.
categories: butterfly spread,option trading,stock trading,stock,trading,forex trading,forex,currency trading,stock market,investing,investment,finance,personal finance,wealth building
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MLA Style Citation:
Nino, Ted "Butterfly Spread: Monthly Income Bread and Butter." Butterfly Spread: Monthly Income Bread and Butter. 24 Jun. 2010. uberarticles.com. 3 Aug 2014 <http://uberarticles.com/finance/stocks-mutual-funds/butterfly-spread-monthly-income-bread-and-butter/>.
APA Style Citation:
Nino, T (2010, June 24). Butterfly Spread: Monthly Income Bread and Butter. Retrieved August 3, 2014, from http://uberarticles.com/finance/stocks-mutual-funds/butterfly-spread-monthly-income-bread-and-butter/
Chicago Style Citation:
Nino, Ted "Butterfly Spread: Monthly Income Bread and Butter" uberarticles.com. http://uberarticles.com/finance/stocks-mutual-funds/butterfly-spread-monthly-income-bread-and-butter/
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