The option 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.
When you look at a risk graph of the butterfly spread trade, you'll be able to see that the butterfly payoff is massive - particularly when compared to other option income spread methods such as the iron condor, the credit spread, the diagonal, double diagonal, the calendar, double calendar, etc.
Depending on where exactly the wings are set on these trades, or in other words how close or far the long options are acquired in relation to the strikes being sold, it is possible to create a butterfly trade where the possible reward is numerous times greater than the risk of loss is that is 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 stays in the general neighborhood of this tall, narrow income tent - and just as long as the trader doesn't plan to stick with the position all of the way until final expiration day - an excellent income can still be obtained from these butterfly spread trades as the zero day earnings line on the risk graph rises up really quite rapidly, allowing a good quality healthy return to be realized in a pretty short time frame.
When you look at a risk graph of the butterfly spread trade, you'll be able to see that the butterfly payoff is massive - particularly when compared to other option income spread methods such as the iron condor, the credit spread, the diagonal, double diagonal, the calendar, double calendar, etc.
Depending on where exactly the wings are set on these trades, or in other words how close or far the long options are acquired in relation to the strikes being sold, it is possible to create a butterfly trade where the possible reward is numerous times greater than the risk of loss is that is 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 stays in the general neighborhood of this tall, narrow income tent - and just as long as the trader doesn't plan to stick with the position all of the way until final expiration day - an excellent income can still be obtained from these butterfly spread trades as the zero day earnings line on the risk graph rises up really quite rapidly, allowing a good quality healthy return to be realized in a pretty short time frame.
About the Author:
Though butterfly spread trading can be a wonderful line of attack to create passive profits, of course like any trading technique there are potential pitfalls investors should be mindful of before jumping in. To discover more about how to correctly trade this tactic, visit butterfly spread site now.
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