The 100% Risk-Free Options Strategy (4 Easy Steps)
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- Опубліковано 31 гру 2024
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Generally, when it comes to trading Options, it's impossible to have a strategy that has absolutely no risk.
However, there is ONE strategy that if certain conditions are met can actually become a 100% risk-free strategy.
And the best part is that it's 100% legit and can be done by anyone.
So what's this 100% risk-free strategy?
I reveal exactly what it is and how to set it up in this video...
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Thank you! Your content is very insightful, helpful and valuable.
You're welcome!
I've been doing this for awhile now especially since the market has been going up. I like how I can free up my buying power and still have an opportunity to profit on the trade with no risk. Excellent explanation, thanks Davis!
You're welcome ☺️
OTM forward ratio credit spread -> convert to long butterfly spread once the deepest OTM contract (equidistant from the shorts) can be purchased for less than the original credit
Very clever, Davis. This approach would likely work best in a neutral range bound marketplace where price is rising and falling but trending sideways over time. If the market is trending up there would be little issue buying the second long put below the credit from the ratio spread but the chances of price falling under the profit tent would be low. In a bearish market it might be challenging to buy the second put below ratio spread credit since that put value would be inflated, as you mentioned. What has been your experience/success in buying the put =< the credit received? How long did it take for the put order to fill after you purchase the credit spread? Thanks for an excellent video.
Depends on how you construct it and can be pretty quickly if the market moves in the right direction.
Thanks for nice explanation. One questiob, when should I close this butterfly?
A few ways dependent on you and the undelying you're trading:
1) Set a fixed TP %.
2) Hold to expiration (on cash-settled index)
3) Combo of the above.
4) Discretionary exit.
Thanks for the wonderful strategy if you can show a live working example with differnet price stock up and dowm and capture that will be helpful to visualize
You're welcome
Hi David, what expiration days we choose, is it 45 days
Can we trade weekly options? Thanks
Weekly options are genereally more expensive.
Great video! What is a reasonable percentage of max profit where you close the trade for a winner?
Hey Davis, thanks for your video one question I would ask for you is, how can you get fill for these type an order especially on the sell, because if closed as a spread all legs need to qualify as a single transaction. "Do you have a spread or multi-leg options order entered at the nat price that is not filling? If so, you're not going crazy. When it comes to an order fill, spreads are unique, because the entire order (all the legs) must fill at ONE exchange. To understand this, you have to know how options quotes work. In the world of option quotes, the best quote must display. That means the highest bid price and the lowest ask price will list as the quote from all exchanges. This quote system is commonly known as the National Best Bid and Offer (NBBO). "
You're welcome. It's closed as a single order ticket to avoid legging risk.
@@optionswithdavis Right but the issue as I mentioned in order to do that you need all legs to go in one transaction which seems like it can be very difficult on bid ask
funny story to help remember, thanks Davis
You're welcome!
Thank you for sharing your investment strategy. What would be the opposite if the market is going down. -buy a put and sell a call spread?..
Am I right to say in order to construct risk free butterfly, once you obtain put ratio spread for a credit, the market needs to move up first so that the long put value will decrease less than the credit received, then we buy the long put.
Once we have risk free butterfly, we hope the market move down into the tent for more profit
my broker dosn't allow the riskfree strategy
That's exactly right, I think. After getting credit for the put ratio spread, the market price has to move up first to bring the last long put's value under the credit received. Then, hopefully, the market price will come down by expiry date to somewhere around the middle of the tent. That's the best scenario.
It has to go up or stay stagnant at the current price.
If I were to experiment with it, I will experiment with cash settled instruments like XSP.
I like your good thoughts but when you setup the trade the final buy where we have to buy in limit market price is always more than your limit. We have to wait for the decay for that limit leaving the trade in 100 pct risky. And if there is a sudden opposite move you will not get a chance to reach that limit price.
Good insight, but the idea here is to trade it as a Put Ratio Spread (PRS) and only convert to a risk-free butterfly to free up your buying power if the market condition allows it. Otherwise you trade it as a PRS as you normally would. That means you already have the proper risk management and capital in place to trade the PRS. It's only risky if you don't have the proper risk management in place and you're not adequately capitalized to trade it on the underlying you choose. As always, it's important to take a loss on the trade if it's time to take a loss and not let any single trade wipe out your account.
Here's a few videos on how to trade the PRS properly:
- ua-cam.com/video/8HJ9zO9_VBc/v-deo.htmlsi=myRbMrmCHlKNzoN-
- ua-cam.com/video/W50hkUq-iys/v-deo.htmlsi=NwAkmthkID8RIOLh
- ua-cam.com/video/euu_awAmiPY/v-deo.htmlsi=Nwoqmecl4TkCXNo0
- ua-cam.com/video/yi97UwGVoYA/v-deo.htmlsi=niG3Pm_noH2OjNPa
Your content is excellent. In the event that it exceeds the strike of the 2 sell positions, would it be assigned with the risk of the 200 positions?
I think 100 will get assigned because 2 shorts and 1 long. One short and one long will cancel each other
When I placed this order with Robinhood, I got an error message saying that: "order premium must be less than the collateral". Does it mean I need to have buying power for the two buy puts?
Hi Davis
When i try this on IKBR platform its comeing as debit, and its buying a butterfly, when i change to sell butterfly , all legs get revers ( selling 2 puts become buy and long puts become sell.
Sometimes IBKR sells or calls are very confusing.. just need to be careful and extra alerts.
He's saying you open a put forward ratio credit spread which IBKR should show as a credit to open (IBKR might indicate something like "to buy 1 spread means: buy 1 put, sell 2 puts", although it could also describe the opposite "sell" transaction, too, so the key is that the opening transaction shows a credit for the correct number, side, and strikes for legs)
Thank you. Can you please create a video on how to leg into a risk free short butterfly?
Actually already mentioned in the video with an actual trade example.
@@optionswithdavis Oh no, I must have missed it. Is there an example of short flies? Long body, short wings?
Great video!! I have very limited experience with spreads, but have 2 quick questions: (1) Won't it be better to trade all 4 legs on one trade ticket in order to avoid getting stuck with a put ratio spread, in case the caterpillar is unable to become a butterfly?, and (2) How about choosing strike prices such that the current market price is already inside the tent, preferably at the tent's center?
Good questions. Sounds like you leg into the butterfly (ratio, then long put) to take some market risk to get a better price on the butterfly.
You can do short strikes ATM, but that increases assignment/pin risk, and especially if you leg into the butterfly, can give very substantial short volatility exposure which can create losses. Not bad per se; just needs the right conditions.
A really clever strategy! So if I understand this correctly, does it mean it's possible to build multiple of these risk free butterflies one by one over time as a hedge if the market goes down, and it doesn't take up any buying power?
Correct.
There is a huge option here. In this case the price is stagnant or going up. If a price falls the Put will cost more than the Credit received initially.
How do you select stock for this strategy? Do you have any scanner or filter?
May I ask how come when I process with this butterfly strategy. It gets auto cancel on TOS. Thanks
You can check the error message and talk to the broker. Maybe the margin requirement is too high?
Can you buy multiple contracts each leg to 10x everything (providing you can leg in)?
Learned something new today. Great explanation
😊
Thanks for your videos; very useful. I am one of your subscribers, by the way!
You're welcome and thanks for the support ☺️
This is great, Davis! I do have 1 question though. If the price goes inside the tent or anywhere below the top of the tent (the puts that you sold), isn’t there a risk of early assignment? If so, what would you usually do to handle the risk of assignment?
You can do this to eliminate early assignment risk: ua-cam.com/video/hHK8TdVnjTQ/v-deo.htmlsi=iAYLTN-z4l_P5RK4
@@optionswithdavis thank you! I just subscribed too. I thought I was already subscribed since I’ve been watching your videos for a while now but I wasn’t lol.
Does it converts to butterfly automatically on ANY BROKER, once the Long Put is FILLED?
You'd have to check with your broker. On TOS(Schwab) platform, you can group it together.
3 things to consider.
1. From a margin point of view, the broker will "group" positions together (possibly into a butterfly) to determine risk and margin. This is automatic, but largely the broker's prerogative. If you have shares and/or other expirations open, it's possible the broker will not group the 4 legs into one butterfly. (Also under some schemes like reg-T, some structures like "butterfly" might not even be meaningful).
2. For your own profit and loss tracking, some brokers allow custom groupings, some do not. Or you might give up other functionality to have your custom grouping. A workaround could be to set an alarm or watchlist for the price of the spread (eg, to set conditions for take profit)
3. For closing, probably any broker would let you close all 4 contracts in one butterfly spread order
Great concept. How do you find these opportunities? Do you suggest a scanner?
Hello Dave, Nice. When to execute PE side and When to execute CE side?
What's PE/CE?
@optionswithdavis I mean Call and Put option. When to execute the Put option and when to execute the Call option? And another question is how to execute at same time
You should buy 195 strike price of next month also you should buy 187 strike price of same month after selling 2 lot of 190 then as market goes to 187 then you will not have loss but if market goes to 195 then also you have premium left due to next month expiry.
You are genius, Davis!
Now you can include this in your arsenal, Gilbert 😉
Wish you did Robinhood demonstration as it would be easy to follow tbh
Hi Davis, is a put butterfly spread similar to a call butterfly spread. Meaning to say, sell a call ratio credit spread and then buy a further OTM call of equi distance between the call credit ratio spread width ?
The call butterfly is just the call version of the put butterfly.
I tried this on robinhood once and they wouldn't allow me to do it because there was no risk
You can do 2 Credit Spread instead ( Credit Put and Credit Call but same strike on short position), but i am telling you, it's not easy to filled at premium you want.
It's like saying: buy 100 shares of $100 stock, wait until it gets to $101.1, sell 99 shares, you get back your initial investment of $10,000 +$8.90 and now you get 1 share of stock 100% free.
Good analogy but slightly different with this strategy because you would still get all the benefit of controlling the 100 shares without any risk.
How do I close this?
you need to close in two actions : 1) close put credit spared 2) close debit put spread
You could let it expire (which carries different risks), or you could create a butterfly sell order to close all legs
passing the5ers prop challenge was easy with chart patterns.
If the market goes down? How much do you lose when you lose?😥
Like with any trade, you look at the p&l graph.
To put it more accurately, it’s more of a risk-free adjustment rather than a strategy.
Unless you see the adjustment as part of your strategy 😉
please share all excel thanks
" Be a man and do the right thing" reminds me of Russell Peters stand up when he talked about price negotiation b/w Middle Easterners and Asians.... very funny.
That's right 😂
😂❤
ive expired worthless on my wife too... lol
Should the price go against you, and you don't get filled on the $177.00 you can be immediately under water. Right?
Worst case is you have to buy 100 shares assigned from the short strike like cash secured put and also make money from the put debit spread
Hmm market is at 200, and you open by buying 1x 195P and selling 2x 190P.
Market falls to 175. Maybe it's a gap down on open.
Now the long 195P is looking good (maybe +17/sh gain) and the 2 190P are rough (maybe -12/sh loss times 2). And of course, buying the 185P for less than $1.44/sh is out of the question now!
It's a short vol strategy, so...yeah
You should buy 195 strike price of next month also you should buy 187 strike price of same month after selling 2 lot of 190 then as market goes to 187 then you will not have loss but if market goes to 195 then also you have premium left due to next month expiry.
You should buy 195 strike price of next month also you should buy 187 strike price of same month after selling 2 lot of 190 then as market goes to 187 then you will not have loss but if market goes to 195 then also you have premium left due to next month expiry.
You're saying to trade contracts expiring in different months?
You should buy 195 strike price of next month also you should buy 187 strike price of same month after selling 2 lot of 190 then as market goes to 187 then you will not have loss but if market goes to 195 then also you have premium left due to next month expiry.