Long Butterfly Option Strategy
What are the characteristics of this option strategy?
The Long Butterfly Option Strategy is a low-risk strategy that combines a combination of long and short spreads. This strategy can be used to express a directional view of the underlying stock with limited risk and limited total cost. The long butterfly involves buying one call option, writing two at-the-money calls, and buying one more call option at a higher strike price. The strategy profits if the underlying stock price is between the higher and lower strike prices at the expiration date.
Is this a bullish, bearish or neutral strategy?
The Long Butterfly Option Strategy can be used for either a bullish or bearish view of the underlying stock. The maximum profit is realized when the price of the underlying stock trades near the higher and lower strike prices at the expiration date.
Is this a beginner or an advanced option strategy?
This is an advanced option strategy as it requires specific timing and selection of options to maximize the profit potential.
In what situation will I use this strategy?
The Long Butterfly Option Strategy can be used in a variety of situations including: expressing a directional view on the underlying stock, taking advantage of a range-bound stock price, and as a hedge against a long stock position.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Long Butterfly Option Strategy has a risk-reward ratio of 1:1 and the probability of profit is typically between 70-80%.
How is this strategy affected by the greeks?
The Long Butterfly Option Strategy is affected by all of the greeks including Delta, Gamma, Theta, and Vega. Delta will have an impact on the value of the option position while Gamma will have an effect on the rate of change of the value of the option position. Theta will affect the time decay of the option position while Vega will affect the implied volatility of the option position.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is best used in a relatively high volatility regime. The higher the VIX level, the more profitable this strategy can be.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
If the underlying stock moves significantly against the position, it may be necessary to adjust the position to take a loss, or to avoid taking a larger loss. Adjusting the position can be relatively easy if done quickly. However, if the loss is allowed to get too large, the position may need to be closed with a larger loss than originally planned.
Where does this strategy typically fall in the range of commissions and fees?
The commissions and fees associated with this strategy will vary depending on the broker and the size of the position. Generally, commissions and fees can range from $3-$7 per trade.
Is this a good option income strategy?
Yes, this is a good option income strategy. The potential for profit can be quite large, depending on the size of position and the underlying stock price at expiration.
How do I know when to exit this strategy?
A trader should use a number of factors to decide when to exit the position. These include the underlying stock price, the time remaining until expiration, and the amount of risk the trader is willing to take. In general, if the underlying stock price moves significantly in either direction, the position should be exited for either a profit or a loss, depending on the direction of the move.
How will market makers respond to this trade being opened?
Market makers will typically respond to this trade by adjusting the bid and ask prices of the options involved. This is done to ensure that they can cover their own positions when the trade is executed.
What is an example (with calculations) of this strategy?
Let’s look at an example of the Long Butterfly Option Strategy. Assume you’re bullish on a particular stock and you want to profit if the stock price moves to a certain range at expiration. In this example, we’ll use a call butterfly with strike prices of $90, $100, and $110.
The strategy consists of:
– Buying 1 call option at the $90 strike price for $2
– Selling 2 call options at the $100 strike price for $4
– Buying 1 call option at the $110 strike price for $1
The total cost for this trade is $3 ($2 – $4 + $1).
The maximum profit would be realized if the underlying stock price is $100 at expiration. In this case, the option at the $90 strike price would be worth $10, the options at the $100 strike price would expire worthless, and the option at the $110 strike price would be worth $0. The total profit in this case would be $7 ($10 – $3).
The maximum loss would be realized if the underlying stock price is either below $90 or above $110 at expiration. In this case, the options at the $90 and $110 strike prices would be worth $0 and the options at the $100 strike price would be worth $10. The total loss in this case would be $3 ($0 – $3).
Where does MarketXLS come in?
MarketXLS is a great resource for anyone looking to learn how to trade options. It provides excel templates for many popular option strategies, including the Short Iron Butterfly. The template provides detailed calculations for the strategy, as well as step-by-step instructions for entering the trade. It also includes risk measures and performance metrics such as probability of profit and break-even points. In addition, the template includes pre-programmed tracking links so that trades can be monitored and adjusted in real-time. This makes it a great tool for both beginner and experienced traders looking to analyze and trade options more effectively.
Here are some templates that you can use to create your own models
Long Butterfly with Calls Option Strategy
Long Butterfly with Puts Option Strategy
Iron Butterfly Option Strategy
Short Butterfly Spread
Butterfly for Shorts Spread
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Options Trading (Strategies)
2 Leg Option Strategies
Maximizing Profits with a Bull Put Spread Strategy
Long Butterfly Spread With Puts (Using Excel Template)
5 Successful Options Strategies Using The Most Liquid Options