Butterfly Spread Options Strategy with San Jose Options

In this excerpt from our options mentoring course, David gives us some insight on understanding the Butterfly Spread.

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Butterfly Spread Options Strategy with SJ Options

…interested in. Same numbers of contracts, 10, like 20, like 10. Look at what it’s going to cost you. It’s not going to cost you $100, it’s going to cost you 9,400 on the put side, on the bear side and on the bullish side. Your peak is going to be less than it normally would on a narrow strike. It’s 30,000 but that’s because you’re putting more into the trade at the beginning, this 940 debit. If you wind out the strikes, you’re going to get a wider breakeven and a potential profit of higher as opposed to the last trade but you’re putting more into it.

It’s all risk reward, it’s all about probabilities. You’re not necessarily going to get an edge or think you’re fooling anybody on a traditional butterfly because that’s how these are constructed and people trade these all the time. Once again, you probably know what I’m going to do here down at the calls. Nine-forty debit, let’s change it to puts. What’s the debit going to be? Nine-forty. It’s the same trade so don’t worry. You should go and change them and make sure that it’s the same trade. If one’s trading for 9 and one’s trading for 940, go ahead and trade the one that’s 9 but I’ll bet you they’re always going to be within about a penny or so.
This trade is going to be higher risk, we put more money into it but it’s going to be higher probability and the breakevens are wider but you paid for it. We can set these slices to the breakevens if you wanted to do that. This would show you that you got about a 21% chance of this staying within the breakevens. Not necessarily the best trade, in my opinion but I do want you to realize and understand this type of trade.

In a lot of studying you’ll hear this trade called the 1-2-1 butterfly and that just means you bought one of the shorts or the low strike, you bought 2 of the middle strike or you sold two and then you’ve bought one of the high strike. That’s where they get 1-2-1. If we go back to simulated trades and change this to single, we can…