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Trading Justice

Trading Justice

Control Your Financial Future

Inverted Butterfly Options Strategy

July 30, 2018 By Tim Justice

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
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Related

  • Episode 214 – Bank Trade Open
  • Episode 210: Credit Spread
  • Episode 209: Daily Trading Routine
  • Episode 206: And the Winner is…
  • Episode 187: Catching a Falling Knife
  • Episode 181: Market Wizards Podcast

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