AGAIG Catching Option Butterflies In ThinkOrSwim

[csricksdds]

Catching Butterflies trading options can be a rewarding experience!

What is an Options Butterfly?

An Options Butterfly consists of a Debit Spread combined with a Credit Spread. The body of the butterfly is comprised of the two short positions combined together (the body of the butterfly) while the two long positions, one on each side of the body are called the wings. The beauty of a butterfly trade is the low cost compared to the potential return if the trade pins near the body or ITM.

Any stock (ETF), that has options can be Butterfly traded. My favorite is the SPX Butterfly which is cash settled (meaning it can’t be closed against the trader – the trader is the only one who can close the trade and, if not closed, will become cash settled at expiration).

To buy a SPX butterfly you would place your pointer on the strike that you want to be the body (the two short positions) of the butterfly , right click on that strike go up to buy and then click on butterfly. This will open a 5 point SPX Butterfly Spread Trade. As I write this the SPX closed today at 5127.79. A five point Call 5125/5130/5135 spread would have been ITM (In-the-money) and returned $127.79 minus what you paid for the butterfly.

I like to trade the SPX 0DTE after 1 p.m. (as late as possible) in the afternoon when there is a pullback in the SPX and my indicators show a positive change in direction. The maximum loss that can be sustained is the amount you paid (risk) for the butterfly. (Both a Call and/or a Put Butterfly can be traded equally as well).

As a side note: The big boys (algorithms, computer trades, etc.) are mostly fond of the 25, 50, 75 and 100 strike positions. Today those levels would have been the 5100, 5125, 5150 and the 5200.

At his point for tomorrow there is action at the 5140. A Butterfly centered on the 5150 is listed at .40 - .90 and probably could have been bought for somewhere in the mid-point. One of my favorites is to guess where the next Friday SPX will close. Maybe this Friday we might have a close at 5200. A 5200 5-point Butterfly can probably be bought for less than .25 and a 10 point spread 5190/5200/5210 for less than a dollar. These can be closed at any point you wish prior to expiration where there is an acceptable profit worth taking. A closing pin at 5200 would be worth $1,000 for a 10 point spread less the amount paid. I have paid as little as .!5 - .20 for one of these.

A happy note for traders who are limited in the number of day trades available. Since the SPX is cash settles you can leave the trade in place and it will automatically close at 4:00 p.m. and will not count as a day trade unless you close it yourself prior to closing (it then becomes a day trade). You would manage this trade as any other and close it out if the stars don't seem to be line in your direction

When I make a post like this it is usually listed as “Tutoring” which reminds me of an old Far Side Cartoon with a car backing out of the driveway and a large dog sticking his head out the window talking to the next door neighbor dog saying “Hey Biff, I’m going to get tutored!”

Hopefully my tutoring will provide for a more favorable outcome! Catching Butterflies can be both fun and rewarding!

 

[csricksdds]

Addendum to Catching Butterflies:

I mentioned the favorite areas for market makers as being the 25, 50, 75 and 100 levels. Take notice that these levels are also a favorite for retail traders (like you and me).

Retail traders place a lot of $5 spreads (including $5 spread butterflies) around these areas and the market makers are well aware of these spreads. As such, they (market makers, algo & computer traders) will frequently close the SPX market a little bit just below, or a little bit above these spreads to try to keep them from being profitable.

It has been my experience with Butterflies that a 10 point spread is more profitable in the long run, as it takes away the ending assault on the 5 point spreads. Of course, a 10 point Butterfly costs a little more but they can be placed several days in advance around the most active areas if you choose. For instance an SPX 5/17/24 5190/5200/5210 can be placed for less than $1 (if you think that level might be achieved? There is also activity at the 5250 level as well as at the 5150 Put level). Just a little extra food for thought?

 

[apdusp]

SPX butterflies, together with calendars/diagonals (vega negative and positive have complementary effect), are more than enough to make a living, at most of market conditions, with very good reward/risk potential. I traded many of those for quite some time, based in styles that I learned from Mark Fenton when he was with Sheridan Mentoring ( now with Aeromir ). You may find many of his videos in youtube and elsewhere. I changed a bit of focus to credit spreads, though I could return anytime back to the flys/cals, as it consumed more time than I was willing to apply to those trades, but I really miss trading those. I know they work but there's always a personal tradeoff.

On a second thought, your post might trigger a comeback, so thanks for it.

 

[csricksdds]

as much I agree with you, let me mention a quote relevant to me, "It is not your duty to finish the work, but neither are you at liberty to neglect it", as in this case, reaffirms that even if you are minuscule compared to other players, you can never give up trying

Very true and good comment....meanwhile back to my friend Dilbert: Dilbert: "I INVESTED ALL OF MY MONEY IN STOCK OPTIONS" - Dogbert: "WHAT IS AN OPTION?" - Dilbert: "IT"S COMPLICATED...BASICALLY, YOU GIVE YOUR MONEY TO A STOCK BROKER AND HE BUYS NICE THINGS FOR HIS FAMILY" - Dilbert: "DO YOU HAVE ANY SNIDE COMMENTS" - Dogbert: "NO, YOU TOOK ALL THE FUN OUT OF IT"

 

[timing]

Addendum to Catching Butterflies:

I mentioned the favorite areas for market makers as being the 25, 50, 75 and 100 levels. Take notice that these levels are also a favorite for retail traders (like you and me).

Retail traders place a lot of $5 spreads (including $5 spread butterflies) around these areas and the market makers are well aware of these spreads. As such, they (market makers, algo & computer traders) will frequently close the SPX market a little bit just below, or a little bit above these spreads to try to keep them from being profitable.

It has been my experience with Butterflies that a 10 point spread is more profitable in the long run, as it takes away the ending assault on the 5 point spreads. Of course, a 10 point Butterfly costs a little more but they can be placed several days in advance around the most active areas if you choose. For instance an SPX 5/17/24 5190/5200/5210 can be placed for less than $1 (if you think that level might be achieved? There is also activity at the 5250 level as well as at the 5150 Put level). Just a little extra food for thought?

yes, but the hardest part is: "if the trade pins near the body or ITM." and the distance between strikes.
could you please explain a little bit more on these two, based on your experince.

 

[timing]

SPX butterflies, together with calendars/diagonals (vega negative and positive have complementary effect), are more than enough to make a living, at most of market conditions, with very good reward/risk potential. I traded many of those for quite some time, based in styles that I learned from Mark Fenton when he was with Sheridan Mentoring ( now with Aeromir ). You may find many of his videos in youtube and elsewhere. I changed a bit of focus to credit spreads, though I could return anytime back to the flys/cals, as it consumed more time than I was willing to apply to those trades, but I really miss trading those. I know they work but there's always a personal tradeoff.

On a second thought, your post might trigger a comeback, so thanks for it.

Which credit spread is your favorite?

 

[apdusp]

Which credit spread is your favorite?

Mostly bull puts with $5 spreads focusing on getting between 0.40 to 0.60 credit, 15 to 30 days to expiration, based in liquid weekly options on large cap stocks, as well as a few leveraged ETFs. In addition, SPX and NDX with $10 to $25 spreads but shorter DTEs. bear calls as well as iron condors have proved a bad choice for me, so i try to keep it simple. main difficulty with credit spreads is when to close a trade when it goes against you, or eventually adjust it. in my experience, it is much more important to keep loses within reasonable limits than having a high winning rate.

 

[csricksdds]

Mostly bull puts with $5 spreads focusing on getting between 0.40 to 0.60 credit, 15 to 30 days to expiration, based in liquid weekly options on large cap stocks, as well as a few leveraged ETFs. In addition, SPX and NDX with $10 to $25 spreads but shorter DTEs. bear calls as well as iron condors have proved a bad choice for me, so i try to keep it simple. main difficulty with credit spreads is when to close a trade when it goes against you, or eventually adjust it. in my experience, it is much more important to keep loses within reasonable limits than having a high winning rate.

Sounds like you have a good plan that works for you and that's what matters!