Unbalanced Butterfly Option Strategy
What are the characteristics of this option strategy?
The Unbalanced Butterfly Option Strategy is an advanced non-directional option trading strategy. It involves selling 1 out of the money call option, and simultaneously buying 2 at the money calls and 1 in the money call. This gives trader a potential to profit from changes in volatility without taking directional risk. The maximum profit is capped, while the maximum loss is unlimited, so the risk/reward ratio is slightly unfavorable.
Is this a bullish, bearish or neutral strategy?
The Unbalanced Butterfly Option Strategy is a neutral strategy, because it does not take a directional opinion on the underlying asset. It does not matter whether the underlying asset goes up or down, so long as the volatility of the underlying is changing.
Is this a beginner or an advanced option strategy?
The Unbalanced Butterfly Option Strategy is an advanced strategy. It requires a knowledge and understanding of options, market dynamics and risk management.
In what situation will I use this strategy?
The Unbalanced Butterfly Option Strategy is best used when you expect the underlying asset to exhibit volatility but remain within a certain range, over a certain time period. The key to success with this strategy is timing the opening and closing of the position in a way that will profit from the fluctuations in the volatility.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Unbalanced Butterfly Option Strategy typically has an favorable risk/reward ratio, with the maximum profit and the maximum loss being capped. The probability of profit is usually higher than 50%
How is this strategy affected by the greeks?
This strategy is affected by the following greeks: delta, gamma and vega. Delta measures the sensitivity of the option to changes in the underlying asset, while gamma measures the sensitivity of the delta to changes in the underlying asset. Vega measures the sensitivity of the option to changes in volatility.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Unbalanced Butterfly Option Strategy is best suited for markets with moderate levels of volatility as it is designed to profit from changes in volatility without taking directional risk. A VIX level of around 20 is considered to be optimal, as it allows for enough price fluctuation but not too much.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the Unbalanced Butterfly Option Strategy when the trade goes against you can be tricky and requires knowledge and experience in options trading. The difficulty of the adjustment will depend on the market conditions, the underlying asset and the duration of the trade. It is recommended that you practice adjusting the position under simulated trading conditions before attempting to do it with real money.
Where does this strategy typically fall in the range of commissions and fees?
The Unbalanced Butterfly Option Strategy typically incurs high commission and fee costs, as it involves trading six options contracts. It is important to factor in these costs when trading this strategy, as they can eat away at any profits made from the strategy.
Is this a good option income strategy?
The Unbalanced Butterfly Option Strategy is typically used as an income strategy, as it provides higher probability of profits. However considering that downside risk in value terms is higher, it is not recommended for risk averse investors
How do I know when to exit this strategy?
The Unbalanced Butterfly Option Strategy can be difficult to exit, as it involves trading six option contracts. It is important to monitor the situation closely and adjust the strategy as required. Good exit points include when the maximum profit has been realized or when the underlying asset gets to the point where it could lead to a large loss.
How will market makers respond to this trade being opened?
Market makers will typically bid up the prices of the options when the Unbalanced Butterfly Option Strategy is opened, as they want to benefit from the spread between the bid and ask price. Therefore, it is important to factor in this cost when trading this strategy.
What is an example (with calculations) of this strategy?
Consider a stock trading at a price of $290. A trader can execute iron butterfly option strategy by selling 3 puts with a strike price of $285, and simultaneously buying one put option with a strike price of $290 and 2 put option with a strike price $275. The investor enters this trade by earning a net premium of $11. If the stock stays above 280 at expiration, the investor will make a maximum profit of $485. However, if the stock closes below $275, the investor will make a maximum loss of $1500.
MarketXLS
MarketXLS is a powerful Excel-based financial and options trading platform, designed to give traders in-depth analysis, greater insight and more control over their investments. MarketXLS provides real-time quotes and data, interactive charts, customizable spreadsheets, specialized trading tools, and extensive back-testing capabilities. In addition, MarketXLS has an extensive library of options trading strategies, including the Unbalanced Butterfly Option Strategy. With MarketXLS, traders have the tools they need to develop and manage their strategies more effectively and measure their performance accurately.
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Relevant blogs that you can read to learn more about the topic