Philosophy

• This trade is used when you have no directional bias, but you believe a stock will move up or down enough to capture a profit. It’s commonly used as an earnings strategy.

Construction

• Trade Identification: -3,-2,+2,+3
• Technicals: Bi-Directional
• Strategy Type: Vega and Gamma
• Delta: Buy +2 at .50 delta and sell -1 @ .25 delta and -1 @ .75 delta
  • -1/+2/-1 composition
• Theta: Negative if the stock stays in the middle, positive if it moves sharply
  • Use options 1 to 8 weeks until expiration.
• Vega: Negative.
  • Largely hedged from the nature of the spread
  • Changes as the trade moves
• Position Size: Small relative to your account. 1-2% is typical.
  • Non-Core trading strategy

Management

• Stop loss: none.
  • Advanced management and ability are required to make this trade.
• Target: 50-90% of your total credit received
• If the options are OTM at expiration, consider letting them expire. If they are ITM, consider closing to avoid assignment fees which tend to be higher than commissions.

Resources:

Watch

• Trading Basics – Inverted Butterfly Earnings Trade
• Options Report July 28th 2018

Read

• Earnings Season Plays
• Options Theory – Game Earnings Gap
• Morning Mailbag
• Women in Trading – Portfolio Design