Long Butterfly Options Strategy (Best Guide w/ Examples)
Вставка
- Опубліковано 6 лип 2024
- ✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: geni.us/options-trading-pdf
💰 Get up to $3,000 when you open and fund your first tastytrade brokerage account: geni.us/tastytrade
🔥 Learn data-driven options strategies: optionsforbeginners.teachable...
The long butterfly spread (buying a butterfly) consists of purchasing a call (put) spread, while simultaneously selling a call (put) spread with the same short strike price. All options are in the same expiration cycle, and both spreads should have the same strike width for standard long butterfly spreads.
Long butterfly spreads profit from time decay or decreases in implied volatility when the stock price is near the short strike.
In this video, you'll learn:
1. How to construct call butterfly spreads
2. How to construct put butterfly spreads
3. What the expiration risk profile graph looks like for long butterfly spreads, as well as in-depth explanations as to why profits or losses occur at various stock prices.
4. How do long butterfly spreads perform when the stock price changes?
Additionally, you'll see performance visualizations for three real long call butterfly trades so that you can understand how the strategy performs in different scenarios.
==== FAVORITE OPTIONS TRADING BOOKS ====
How to Price & Trade Options: amzn.to/2FqsPmn
Option Volatility and Pricing: amzn.to/2SU6f8K tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade. - Навчання та стиль
✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: geni.us/options-trading-pdf
Your graphs with P/L are great.
Thank you!
You are the best teacher ever. Finnaly I understand this baby. Thank you so much!!!!!
Thank you for the kind comment! I really appreciate it!
Solid video as always. Thanks for breaking it down. I think I may need to watch it about 25 more times....but I do have a better understanding of this strategy. Aloha!
Thanks for watching! Understandable though. Like anything, it takes lots of repetition to internalize these concepts.
Thank you for sharing very detail and helping me to understand much more about butterfly.
You're welcome!
Dude you are the absolute G.O.A.T. Your explanations are on point. Thanks a lot.
Goat? Like that animal?
@@Lmao-ke9lq G.O.A.T. is an abbreviation for Greatest of all time
hi can i get the pdf of the strategy and all strategy which you have shown presentation . also i want the most common strategy which we need to master i am indian stock market and can you guide me which strategy shall i master
Hello Chris, do you think we should take a look at the current skew regarding whether to go with a Put or a Call butterfly? I mean if the skew benefits the Put options, for example, we may have better prices for that.
that was a great explanation man
Hello,
Great explanation of this strategy. I'm looking to try it out soon on a weekly basis using calls for the stock AT&T Inc., since based on my understanding it is a pretty rangebound stock that is likely to remain close to its current market price. One of the things I was curious about was the actual execution of the strategy, in particular assignment risk. Is it best managed by closing out the position early whenever the underlying price is trading near the short strike?
Thanks,
Abhi
Hey, for the "Example of a Put Butterfly" early in the video, shouldn't it be Long 100/105 Put Spread and Short 105/110 Put Spread? Thanks
You you first started the butterfly spread why is it when you start on the position and the price is almost exactly in the max profit range is it not worth the max profit?
Great video, I was wondering where did you make those P/L graphs? They are clean.
Thank you! I use matplotlib, which is a Python plotting library.
what are the difference between a bufferly like this that centres around the ATM price, vs one that straddles a out of money strike, this seems like non-directional bufferfly
For the long call butterfly spread example, are you at risk of getting assigned shares is price closes above 300, but below 350?
Can I be profitable before the expiration?
So Chris how long have you been studying options trading for? Also very interested in the steps you took to get so damn good! Great vid man I always learn a ton from you!
Since 2013 I've been actively involved with options essentially full-time. My best advice is to try and understand the WHY behind everything you learn. There's always a good reason. Simply memorizing concepts like "call options increase in value as the stock price increases" is a way to learn things short-term, but understanding WHY the previous statement is true is how you develop a deep understanding and retain that knowledge.
I recommend googling everything and reading as much as you can, hopefully from quality sources.
And then follow the rabbit hole. Did you google about one thing and read about something else that you're curious about and don't understand? Google that too.
^ That's basically how I approach everything I learn. :)
Consistent exposure is the best way to learn, but don't burn yourself out!
@@projectfinance awesome thanks Chris! I try to get at least 2-3 hours of learning before work every morning and also listen to alot at work during the day.
Hi, only long call butterfly example, no long put butterfly example? What is the scenario of long put butterfly stradegy? is it also predicting stock price moving in a certain range?
Great question!
Long call butterflies, long put butterflies, and short iron butterflies are all the exact same positions in terms of risk/reward and the profit/loss zones.
All three strategies make the most profit when the stock price is right at the short strike at expiration, and all three strategies benefit from a decrease in implied volatility when the stock is near the short strike.
The only difference is the options used to construct the strategy.
That's why I only used long call butterfly examples -- put butterflies are the same exact position. If I swapped out the call butterflies for put butterflies, all of the graphs and examples would be the same.
Strategically, sometimes it might be better to trade a put butterfly instead of a call butterfly. For instance, if a stock is paying a dividend soon, a trader might choose a put butterfly over a call butterfly since the short calls in the call butterfly could be at risk of assignment if they're in-the-money with little extrinsic value before the ex-dividend date. If the trader used a put butterfly, they wouldn't have to worry about short call assignment risk since a put butterfly doesn't have any call option components.
I hope this helps!
-Chris
great reply,thanks a lot
Is this to be done in low IV or high IV environments?
If done in a low IV environment, the butterfly will cost more because there's a higher implied probability that the stock price won't move around as much (since the option prices are "cheap" which is why IV is low).
If done in a high IV environment, the butterfly will cost less because there's a lower implied probability that the stock price won't move around a lot (since the option prices are "expensive" which is why IV is high).
In other words, the cost of a butterfly relates to the level of IV, which stems from option prices, and option prices imply how much a stock is expected to move.
By purchasing a butterfly in high IV, if the stock price is near the short strike and IV decreases (in other words, the option prices get cheaper/lose extrinsic value because the market anticipates less stock price movement than before), the butterfly's price will get more expensive because the implied probability of the stock expiring in the butterfly's profit zone increases.
TL;DR if you buy a butterfly in high IV, you can profit quickly if the stock price remains near the short strike of the butterfly and IV decreases. Buying butterflies in high IV is a common approach for this reason.
Is there a risk of an early assignment? Or just at the expiration?
Technically there is risk of early assignment, but only if the short option that is in-the-money has little extrinsic value.
Is the butterfly a hedge, speculation, or arbitrage? (I’m almost certain it is not speculation)
I trade the butterfly in a speculative manner, meaning I use it as a bread and butter strategy and follow a plan with the butterfly being the base strategy of the trading plan.
Are we need to wait the option to expired to get a max profit for long call butterfly ?
expiration means no extrinsic value so yes to your question but also the butterfly needs to be close or at the strike price of your 2 sold options to also have no intrinsic value. So you gotta get the right price at expiration which is really hard and less probable. Best thing for you to do is as soon as your butterfly has 25% or 50% or 75% profit just close it, Otherwise you may end up losing it if you wait for expiration coz price can go far away
@@vegitoblue4390 thank you
@@abangkacak6006 no problem 😎
So it’s like a box chart basically
Hello Chris, can you please explain how we are getting the break even of $322.94.What's the logic behind it. Kindly reply..!!
Hey! It's "at what prices will the butterfly have net intrinsic value equal to the purchase price?"
If I buy a call fly for $2.50 (long 100 call, short 2x 105s, long 110 call), the breakevens are:
$102.50 on the lower end, because at $102.50, the 100 call has $2.50 of intrinsic and the 105/110 calls expire worthless. The butterfly is worth $2.50 at expiration.
The second breakeven is more complicated, but it's $107.50. If the stock price is at $107.50 at expiration, each call has:
100 call = $7.50 intrinsic value
105 calls = $2.50 of intrinsic each, total of $5.00 intrinsic value for two short contracts
110 calls = $0.00 intrinsic.
Since you own the 100 call, you own the $7.50 intrinsic in the long 100 call. But since you're short 2x 105 calls, you're short $5.00 of intrinsic. So if you own options worth $7.50 and you're short options worth $5.00, your position has a value of +$2.50.
Since you paid $2.50 to enter the trade, there's no profit or loss.
Does this help?
@@projectfinance Well explained, I had the same doubt
You say the butterfly spread involves selling two calls, so do you need to already own them?
No, you sell to open.
im still kinda confused, when buying a long butterfly spread are you hoping for the stock price to go down?
Stay at or near the 2 short call/puts price
Essentially you're setting a range you expect the stock price to stay in. If it leaves that range, you lose
May i suggest the following. Go check the real prices on options of any company and see if you can make it work even theoretically. Chances are (99.9999%) every single time you purchase low and high strike options price paid would be higher than the price at which you can sell the middle ones. So, in real life, even the opportunity to try with profit is not. No disrespect to the author, perfect explanation, but it is just a theoretical work that does not exist nowdays.
Yes. that is the reason, it is debit spread. Take TSLA. 4/16 Expiry. 680/700/720 ; Premium -23(1);+14(2);-8(1)=31-28=3. You pay $300 and by next week if TSLA trades around 700, you sell and get $2000. Profit $1700
@@orkayen i misunderstood video, as i was watching it late at night, thought that he has profit already from purchase and sale. Was commenting to that.
If people are okay with minus 300 dollars from the start and limits on profit, as well as limits on losses below original investment (losing more than originally invested) its all good.
Also, if options sold are exercised before expiry date and stock later falls, making both held options if unexercised becoming worthless. So it works only on european options and not american options.
Using your example.
Tesla goes from 680 and 720 purchased, two 700 ones sold (minus 300).
Price goes to 710, but terrible news is about to destroy tesla (Ilons tweet wrongly interpreted:), purely theoretical) person holding 700 exercises options and sells (because it is the bank who purchased the stocks and sells shares after hours). Next day Tesla stock is worth 500. Your both options are worthless, 142000 dollars are written off by the your brokerage as they provided for your shares (you were respinsible) to the bank who exercised options at wrong for you time. And you also had minus 300 from the start:)
With European options, its the price at expiry date, american options van be exercised whenever
@@maximmatkovsky6490 No, you don't lose more than your initial investment. Your profit is almost 600%. As always, you enter long when you feel the market and the stock are bullish. In a bear market, if you enter long then you lose the initial investment. Typically, this is done on a weekly basis.
@@orkayen i just told you hypothetical example where if option is american you can lose more. Crashes always are unexpected:)
Plus profit is limited to 600%, loss is limited (with european option) to to a but more, have to calculate.
Example in a video range was minus 2700 plus 2200.
And if you believe in the bull (bear) market, why not simply buy 680/700/720 calls (puts) and have limit of loss only on what you invested and no limit on profit at all. Much easier imo, though this video was purely educational so all is good
Bet you never used this strateg in real life
I use a variation of it which is the short 'Iron' Butterfly (long OTM put, short straddle, long OTM call). The risk profile graph looks exactly like a long butterfly's risk profile graph. The risk/reward is exactly the same when using the same strike prices and use options in the same expiration cycle.
But, you're right. I never buy butterflies. :)
wasn't trying to discredit you, but missed some key points about trading long call or put butterflies, which is you have to be perfect on your direction, its mostly done on weekly expiration that expires the same week, since having a longer time frame has zero advantage and you can potentially have more risk and less return. also its best done with a slight directional bias, typically done 1 or2 strike prices away form the money for the lowest cost and highest return. it also needs to be very liquid like aapl, spy and such, plus its probably one of the most difficult option trades to execute properly. i use this strategy a lot on aapl with great success. sounds like your just doing a variation of an iron condor with greater bias on one specific direction. ill take a look at it on tos risk profile.
i just get annoyed when there is not a real strategy on a video, i feel if someone is trying to learn about more advanced option spreads, they are probably looking for other strategic ideas for execution. like a quantitative analysis back test or something like that with different strategies based on the vix, or rsi, or whatever as an example.
You are correct on all fronts. And I know you weren't trying to discredit me, I just wanted to clarify that I do use a variation of the strategy.
There's really no difference between a Short Iron Butterfly and Long Butterfly, except you pay a debit to buy a butterfly but receive a credit when selling an Iron Butterfly.
With the short Iron Butterfly, you want the stock price to remain near the short strike as time passes, just like with the long call or put butterfly.
Just a matter of preference regarding which strategy you choose. I prefer to trade at-the-money or out-of-the-money options, which is what a short Iron Butterfly entails. When buying a call or put butterfly, you're trading one option that's in-the-money.
Project Finance is the only hope we have in defeating BOGANDOFF
Wow i hated calculus