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 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 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 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 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 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 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

  • Holiday Effect in VIX Futures

    With fewer trading days and a historical record that favors an uptick in stocks and a downtick in volatility, the end of the year never fails to present an intriguing set of trading opportunities. One phenomenon related to the above is something I have labeled the “holiday effect". 

     

    By Bill Luby,

    • 0 comments
    • 19 views
  • Fatal Flaws in Black-Scholes

    Is the Black-Scholes pricing model of options accurate? Or even close to accurate? A very interesting study conducted by Sibson Consulting was cited in an article on the topic (Tim Reason, “The Holes in Black-Scholes,” CFO Magazine, March 1, 2003).

    By Michael C. Thomsett,

    • 0 comments
    • 566 views
  • The Hidden Dangers of Iron Condors

    Ever seen those ads about making 5% per month with Iron Condors? It’s certainly possible, but you would have to be a bit naïve to think making a 60% per year return is simple. Most professional money managers cannot achieve those returns, so why would a retail trader be able to achieve it?

    By GavinMcMaster,

    • 2 comments
    • 719 views
  • Assignment and Exercise: The Mental Block

    Assignment and Exercise are among the most basic aspects of options trading that every options trader should understand. In this post I painstakingly explain one of the most basic option basics to a reader who is having trouble understanding that concept.

    By MarkWolfinger,

    • 0 comments
    • 192 views
  • 4 Levels of Trading Experience

    I would like to share with you another aspect of trading- my fascination with the different levels of trading experience. Starting in one of the latest discussions in the comments section, I shared with one of you that experience in trading comes in stages. I call those the 4 Levels of Trading.

    By Colibri Trader,

    • 0 comments
    • 841 views
  • The Spectacular Fall of LJM Preservation and Growth

    Investors of LJM Preservation and Growth Fund, a $772 million alternative mutual fund, got an email on Tuesday February 6, 2018: "LJM strategies have suffered significant losses." The fund (ticker: LJMAX) didn’t report the loss until late the following day, so shareholders were in the dark as to what happened.

    By Kim,

    • 0 comments
    • 483 views
  • 40 Steps In The Trader’s Journey

    It is a well known fact that most retails traders/investors lose money in the stock market. There are many explanations for that phenomenon. Trading is a journey, and not everyone is willing to complete it. Many quit too early. Here are 40 steps in the trader’s journey from new trader to rich trader. They are as follows:

    By SJosephBurns,

    • 0 comments
    • 1,108 views
  • 10 Things You Should Know About VIX

    The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE).VIX is considered by many a "Fear Index".

    By Bill Luby,

    • 2 comments
    • 1,773 views
  • How Does SVXY Work?

    There are many more ways to trade volatility today than there was prior to the financial crisis. Numerous ETF’s and ETN’s have been created as a way for traders to hedge volatility risk or gain exposure to it. Some of these are leveraged 2 and 3 times. To say they can be risky would be an understatement.

    By GavinMcMaster,

    • 0 comments
    • 2,106 views
  • 50 of the Top Trading Quotes Ever

    While trading quotes can be taken out of context, and it is crucial to have a full understanding of what the trader meant at the time, they can also give traders important insights.  I asked some of my followers for their favorite trading quotes. There were a lot of great suggestions, but here are the top 50 that I’d like to share.

    By SJosephBurns,

    • 0 comments
    • 985 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs