Butterfly Spread: Monthly Income Bread And Butter
A great strategy for option traders who believe that the underlying instrument they are working with will be range bound for the next 2 or 3 weeks to a month or so of time is the butterfly spread .
This theta positive option trading method produces profits when the stock or index that is getting traded remains within a contained area on the graph or ends up on expiration day at or near the sold strikes of this trade.
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 fast gains for the investor as a result of the fact how the short strikes of the position (the strikes which are sold) deliver so much premium into the traders account because of the reason that they're being sold ATM or 'at the money'. Strikes that reside 'at the money' generally contain the greatest amount of time premium in them.
While you can find numerous mutations of the butterfly spread, the two most popular are the standard butterfly distribute which is traded for a debit, and then there's the iron butterfly, which is put on for a credit. It is true that these two individual versions of the butterfly spread are indeed different, if you would look at the risk graph of one and then compare it to the other, they would look exactly the same, and they actually perform the same as well.
The butterfly option strategy is a 'delta neutral' strategy, meaning that investors who use this technique do not have an opinion on market direction or believe that the underlying being traded will remain in its general location on the chart for the duration of the trade.
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.
Article Source: FxTradingStock.com
About the Author
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 these trades to generate a consistent monthly income.
by: David Harms
Total views: 55
Word Count: 344
Date: Tue, 22 Jun 2010
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