SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

4 Low Risk Butterfly Trades For Any Market


The other day I was having a conversation with an options blogger and he asked me how I traded. When I told him that my primary trade is the Butterfly option spread, he was surprised and said I was one of the first people he met who regularly traded Butterflies. In a world where Iron Condors get all the love, it wasn't the first time I had that conversation.

I've traded a wide range of options strategies, but, for a number of reasons, the Butterfly is my preferred trade.

 

The Butterfly option spread is possibly one of the least understood and least utilized options income strategies. Butterflies can be used to construct high probability positions with a profit range similar to and potentially larger than an Iron Condor with less risk. Alternatively, a short dated Butterfly option can provide a great risk/reward ratio when traded slightly out of the money. Perhaps my favorite characteristic of the Butterfly is that the position can make money prior to expiration even if price trades outside of the expiration break even points. 

 

In this post we'll take a look at four different Butterflies with very different trading characteristics.

 

1. At The Money (ATM) Butterfly

 

The ATM Butterfly option is the common Butterfly spread that most options traders think about. The position is placed at the money with anywhere from 7 to 50 days to expiration depending on your strategy. The ATM Butterfly is a short delta trade and can be managed by rolling the initial position up or down or adding additional Butterflies when price trades outside of the expiration break even points. The ATM Butterfly is what most traders think of when they think of the Butterfly.

 

The Butterfly pictured below is an ATM Iron Butterfly in the Russell 200 (RUT) with 50 point wings and slightly under 30 days to expiration. The biggest challenge with the position is that it leans short delta and will take heat if the market rallies immediately after the trade is entered.

 

70c34506f1b021bd675a648829baad0f.png

 

2. Directional Butterfly

 

The Directional Butterfly is a balanced butterfly option spread that is positioned slightly out of the money and works like a lottery ticket. Essentially you position the Butterfly above or below the market and want price to trade towards the short strike. Directional Butterflies can be purchased cheaply, which makes the risk/reward ratio very favorable. In the image below, the Russell 2000 (RUT) closed around 1130 and the image shows the 1130/1150/1170 Call Butterfly with around 30 days to expiration. The Butterfly cost is $190 with a maximum payout of around $1,800. However, risk reward isn't even the best part of the trade.

 

One of the great characteristics of the Directional Butterfly is that the profit/loss line will rise outside of the body of the Butterfly prior to expiration. What that means is that, prior to expiration, the range of potential profit is wider than the expiration break even lines would suggest. In the image below the T+Zero line has been advanced two weeks so we're really looking at the T+14 line. What's important to point out is that the range of profit at T+14 is from 1080 to 1175, which is almost 100 points (around an 8% range) and significantly wider than the body of the Butterfly would suggest.

 

eec25cc45cc1156443fe2a115e2dcfa1.png

 

3. Broken Wing Butterfly (BWB)

 

The BWB is positioned slightly away from the money with unbalanced wings. The trade is usually initiated for a credit and has trading characteristics similar to an out of the money vertical spread. Since Butterflies are made up of two vertical spreads, that doesn't come as a surprise.

 

The broken wing Butterfly pictured below is the RUT 1190/1200/1220 Call Butterfly with 28 DTE that could have been opened for a credit of around .80. At the time of writing, the short strikes at 1200 were around 15 delta. The position is short delta and benefits directionally if price falls, but the T+Zero line will rise up near the body of the Butterfly as the trade approaches expiration.

 

8fe608a7837a4258dc312695112436ba.png

 

4. Consistent Income Butterfly (CIB)

 

The Consistent Income Butterfly is my primary trade. The CIB is the combines a Butterfly that is positioned slightly below the money with a long call. The position is constructed with 50 point wings in the Russell 2000 (RUT) and uses a ratio of one Butterfly to one IWM call. On the upside, the position is adjusted by adding up to two additional Butterflies and calls and on the downside the trade is simply rolled down.

 

The philosophy behind the CIB is to keep trade size small on the downside when we expect increased volatility in the markets. On the upside, we add to the position and wait for the bullish trend to rest or pull back. When the trade is started, the position has a very flat T+zero line with the goal of taking on as little directional risk as possible.

 

The image below shows the October 2015 position that is currently open and discussed every weekend. Notice that there is very little directional risk in the trade and a flat T+Zero line when the trade is entered.

 

150d1c501d3d31a9c3f9ea26a4fc8153.png

 

Now what?

 

One of the big challenges with trading any options strategy is coming up with a set of rules for the strategy. All of the trade ideas above provide a starting point for designing an income strategy. One of the reasons the Butterfly provides a great starting point for an income strategy is that the positions have much wider break evens than you might expect. This post discusses how a Butterfly can be constructed to have a range of profit almost as wide as a high probability Iron Condor.

 

Even though the positions above seem forgiving, it's essential to have a trading plan before placing any trade. Trading well always means making positive expectancy decisions.

 

This article is presented by Dan, founder of Theta Trend, a site focused on simple, objective options trading with an awareness of trend.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • How To Create Your Own Indexed Annuity

    Indexed annuities are a life insurance company product sold by insurance brokers for a commission that is based on the amount deposited into the contract. Contract performance is linked to popular indexes like S&P 500, and early withdrawal penalties typically apply for the first 7-10 years if withdrawals greater than 10% of the contract value are taken each year.

    By Jesse,

    • 0 comments
    • 879 views
  • Q&A with Mental Game Coach Jared Tendler

    QUESTION: Thank you for taking the time to participate in a Q & A session with Steady Option. Let’s start with an introduction and a little bit of background on who you are and how you got here.

    By Jared Tendler,

    • 0 comments
    • 1,103 views
  • Using TLT Options to Increase Expected Returns of a Buy & Hold Portfolio

    TLT is the iShares 20+ Year Treasury Bond ETF that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. Even though US Treasuries typically act as a diversifying asset class to mainstream equities, many investors with long time horizons may not be interested in holding TLT in their portfolio because it would lower expected returns.

    By Jesse,

    • 0 comments
    • 1,316 views
  • Tax Efficient Trading Part II: Capital Gains Deferral

    In part I I illustrated how the preferential tax treatment of 1256 contracts could improve after tax returns of a PutWrite strategy over a long period of time. In this article, I’ll continue the illustration by switching from a PutWrite to an ETF BuyWrite (covered calls) strategy while holding pre-tax expected returns constant at 8%.

    By Jesse,

    • 0 comments
    • 1,619 views
  • Tax Efficient Trading Part I: The 1256 Contracts

    Cash settled index options like SPX, XSP, RUT and a few others receive special federal tax treatment where 60% of the gains are reported as a Long Term Capital Gain (LTCG) even if the contract was held for less than a year.

    By Jesse,

    • 0 comments
    • 1,605 views
  • SPY Short Puts vs. Put Spreads

    In this article I’ll be using the ORATS Wheel backtesting tool to compare the performance since 2007 of SPY short puts versus short put spreads. I’ll look at both risk and returns, and different ways of determining position size to adjust for the differences in risk between the two trades.

    By Jesse,

    • 1 comment
    • 2,410 views
  • Signs that you Are Ready to Start Investing

    If you want to build your wealth, you have to make sure that you invest your money. If you put money into a savings account and don’t earn any interest from it, this won’t work for you in the long term. Your money will lose value because of inflation, and this is the last thing that you need. So when do you invest?

    By Kim,

    • 0 comments
    • 1,735 views
  • One Year of Diversified leveraged Anchor

    I almost hate to keep saying it, but the Diversified Leveraged Anchor strategy keeps exceeding expectations and performing as designed. To remind our readers, Diversified Leveraged Anchor was created in April 2020 attempting to further increase performance, reduce risk, and to reduce volatility. 

    By cwelsh,

    • 5 comments
    • 2,816 views
  • Should I Pay Off My Mortgage Early Or Invest?

    Paying off a home mortgage early is a popular financial goal. Most people feel a level financial peace when their home is paid off that is beneficial in many ways. The most common approach to paying off the mortgage early is directly making additional principal payments to the lender on a regular basis.

    By Jesse,

    • 0 comments
    • 1,339 views
  • Option Order Execution Tips

    As a community of option traders, we all can relate to the occasional challenges of order execution. Best practices for avoiding errors as well as techniques for better potential execution will be the focus of this article.  Like countless others in the Steady Options community, I personally have traded thousands of option contracts over the last decade.

    By Jesse,

    • 17 comments
    • 2,961 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido