This is why EVERYONE needs to learn to trade butterfly's:
- Thread starter Steve G
- Start date
Steve G
Active member
Serg - I have had so many request on this that I will soon be launching a class and alert service on Aeiromir, so be on the looking for the launch session in the next 2 weeks. I also do one on one coaching.
I might also suggest checking out this FB group: https://www.facebook.com/groups/tradingbutterflies
SergB, reading your question I realized that there is no good source to learn about butterflies, at least not that I’m aware of. Usually people talk about some specific formations assuming that everybody knows the basics.
Indeed, butterfly configuration (BF) is .one of the very basic structures for options traders. To see what it is start with single long option. It has (so called) unlimited profit potential but costs a lot of money .
For example, if you want to buy SPX put today, 7 dte, that sits 20 points below the spot you have to pay about $56 (means $5600 for a single contract). This is a lot.
To offset this cost traders can sell another put, farther out, creating so called vertical spread. To buy 5 point vertical ($5 difference between strikes) in the same spot you need to pay ‘only’ $1.9. This is much better but you have to kiss goodbye your unlimited profit potential. All you can gain now is lousy $3.1. Huge cut, isn’t it? Of course you have the entry control and can select wider spreads - which will cost you more.
Now, with vertical you still have $1.8 at risk. Can you cut it more? Yes, you can. You can sell another spread to cover all or some costs. If you sell spread right next to the one you've just bought you create a butterfly.
Butterfly in the same place will cost you 0.20. This is cheap no matter how you measure it. And what is the max profit potential? Almost $5. Wow! Isn’t it great? The catch is that that profit is limited to a single spot. To earn this money SPX has to finish at your short strike at expiration. What is the chance of that?
That's what a butterfly spread is.
As with single verticals, with BFs you control widths of verticals used for construction of your structure. And not only that, you also control how verticals are placed in relation to each other (maybe changing name in a way – don’t pay attention to that) and where they are placed in relation to expiration. To start a trade you try to find balance between risk, profit and probability. All art of trading is in the management.
There is no ‘proper way’ to trade BFs. There are many, many techniques and styles. What is bread and butter for one trader can be unacceptable for another. And both can be right (or wrong). General rule I use is to trade ‘static’ Bfs close to expiration (about 1 dte), where ‘static’ means ‘no adjustments’. Trading ‘static’ long term, for me, is unacceptable. My long flies are all managed, no matter what. It is like game of Go – gain as much territory as you can in the most efficient way.
Long term flies are… very boring. For 97% of the trade duration (guesstimate) you are rather save but also save from any gains. At the very ending things are getting excited – that is if you just only watched the trade with vision of ‘pinnig’ . ‘Ocean of flies’ for regular, balanced BFs is mostly flat and calm. Prices are cheap (low risk).
I’m big proponent of self learning. Do not count on your natural skills. Do not count that you can pay somebody to do the work for you. Sure, you take a course, read a book that will speed up your learning but eventually you have to do the leg work. If you have access to options chains – all info is there. The best way, imo, is to observe what is happening to live trade. All models, again – imo, are flowed and if you relay on them you will be disappointed later on.
Hope this post, very basic and general, helped. Bfs are not that complicated. Later, when you ‘get the feel’ differences between variants (and underlyings your BFs are put on) become more and more significant. I totally agree with the topic: that every options trader should, no!, have to know butterflies. I’m bit surprised that Steve G had so many request about butterflies – most likely there are many newcomers to options trading on Aeromir. Hope Steve’s G class will be a good introduction to BF world (I assume it will not be an advanced course, I can be wrong).
Trading BFs does not have to be boring. It can be quite satisfying (but also quite costly what I can personally affirm).
Good luck.
Indeed, butterfly configuration (BF) is .one of the very basic structures for options traders. To see what it is start with single long option. It has (so called) unlimited profit potential but costs a lot of money .
For example, if you want to buy SPX put today, 7 dte, that sits 20 points below the spot you have to pay about $56 (means $5600 for a single contract). This is a lot.
To offset this cost traders can sell another put, farther out, creating so called vertical spread. To buy 5 point vertical ($5 difference between strikes) in the same spot you need to pay ‘only’ $1.9. This is much better but you have to kiss goodbye your unlimited profit potential. All you can gain now is lousy $3.1. Huge cut, isn’t it? Of course you have the entry control and can select wider spreads - which will cost you more.
Now, with vertical you still have $1.8 at risk. Can you cut it more? Yes, you can. You can sell another spread to cover all or some costs. If you sell spread right next to the one you've just bought you create a butterfly.
Butterfly in the same place will cost you 0.20. This is cheap no matter how you measure it. And what is the max profit potential? Almost $5. Wow! Isn’t it great? The catch is that that profit is limited to a single spot. To earn this money SPX has to finish at your short strike at expiration. What is the chance of that?
That's what a butterfly spread is.
As with single verticals, with BFs you control widths of verticals used for construction of your structure. And not only that, you also control how verticals are placed in relation to each other (maybe changing name in a way – don’t pay attention to that) and where they are placed in relation to expiration. To start a trade you try to find balance between risk, profit and probability. All art of trading is in the management.
There is no ‘proper way’ to trade BFs. There are many, many techniques and styles. What is bread and butter for one trader can be unacceptable for another. And both can be right (or wrong). General rule I use is to trade ‘static’ Bfs close to expiration (about 1 dte), where ‘static’ means ‘no adjustments’. Trading ‘static’ long term, for me, is unacceptable. My long flies are all managed, no matter what. It is like game of Go – gain as much territory as you can in the most efficient way.
Long term flies are… very boring. For 97% of the trade duration (guesstimate) you are rather save but also save from any gains. At the very ending things are getting excited – that is if you just only watched the trade with vision of ‘pinnig’ . ‘Ocean of flies’ for regular, balanced BFs is mostly flat and calm. Prices are cheap (low risk).
I’m big proponent of self learning. Do not count on your natural skills. Do not count that you can pay somebody to do the work for you. Sure, you take a course, read a book that will speed up your learning but eventually you have to do the leg work. If you have access to options chains – all info is there. The best way, imo, is to observe what is happening to live trade. All models, again – imo, are flowed and if you relay on them you will be disappointed later on.
Hope this post, very basic and general, helped. Bfs are not that complicated. Later, when you ‘get the feel’ differences between variants (and underlyings your BFs are put on) become more and more significant. I totally agree with the topic: that every options trader should, no!, have to know butterflies. I’m bit surprised that Steve G had so many request about butterflies – most likely there are many newcomers to options trading on Aeromir. Hope Steve’s G class will be a good introduction to BF world (I assume it will not be an advanced course, I can be wrong).
Trading BFs does not have to be boring. It can be quite satisfying (but also quite costly what I can personally affirm).
Good luck.
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