Butterfly Spread - Milking The Butterfly Spread For Consistent Bling
The butterfly spread trade is a preferred strategy with option income enthusiasts. Not only does this trade give the trader a substantial quantity of premium at the start of the trade which might be parlayed into an important monthly cash flow, it also provides an extremely effective position structure which can put up with and tolerate a variety of trading circumstances, including particularly volatile situations like the ones we are seeing now. In a wild stock market exactly where a lot of other option methods do not have a chance, the butterfly spread may be put on and if appropriately monitored, come out smelling like a rose.
Whenever one looks at a risk graph of the buttefly spread, it is apparent that the butterfly spread payoff is massive - in particular when compared to other option spread approaches for example the iron condor, the credit spread, the diagonal, double diagonal, the calendar, double calendar, etcetera.
Depending on where the wings are positioned at with these trades, or in other words how close or far the long options are bought in relation to the strikes sold, it can be doable to generate a butterfly trade where the reward in the trade is many times more than the risk being taken on.
In the instances where the reward is so many times greater than the risk being taken on, it is because the wings are being acquired incredibly close to where the sold strikes reside, creating a really tall yet particularly narrow 'profit tent', which the underlying needs to remain inside of in order to realize that massive payoff. In most cases, the odds of this happening are extremely low.
Even so, if the underlying remains inside the overall space of this tall, narrow profit tent - plus the trader does not plan to stay with the trade all of the way until expiration day - a good earnings can still be extracted from these lower probability butterfly spread trades as the zero day income line on the risk graph soars up pretty rapidly and a first rate return is usually grabbed within a short level of time.
Article Source: FxTradingStock.com
About the Author
Ted Nino is an option selling evangelist - particularly fanatical about trading the Butterfly Spread, the Double Calendar, the Credit Spread, and the Butterfly Spread. Visit his Butterfly Spread Blog to learn more about this option strategy.
by: Ted Nino
Total views: 40
Word Count: 364
Date: Sat, 3 Jul 2010
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