Weekly Options Kickin It With The Butterfly Spread

Posted on March 21, 2011, 5:20 pm, by. under Weekly Options .

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A excellent trading strategy for market players of Weekly Options who feel the underlying vehicle theyre working with will probably be range bound for the next two, 3, or four days of time or so is the butterfly spread .

This method is a plus theta position as it creates profits from the passage of time as the weekly options that are sold in the position decay over time. As long as the underlying vehicle doesnt move too far in either direction or just as long as the price of the underlying index ends up at or near the sold strikes of the option position on expiration day, this position will be profitable.

Here is an representation of a weekly options butterfly spread position:

Buy 5 contracts of QQQQ forty four put. Sell 10 contracts of QQQQ 46 put. Buy 5 contracts of QQQQ 48 put.

These trades can render instant profits for the option trader as a result of the short strikes in the position (the strikes that have been sold) providing so much premium into the investor trading account. This is because the strikes that are usually sold in these option positions are the at the money strikes or the strikes that dwell closest to where the underlying is actually trading at when the spread trade position is first put on. Strikes that rest at the money typically contain the most amount of time premium in them.

Whilst you will encounter a number of mutations of the butterfly method, the two most repeated are the standard butterfly option spread trade which is set on for a debit, as well as the iron butterfly, which is put on for a credit. While these are two different versions of the butterfly spread, if you were to compare at the risk graphs of each they look identical and or the most part they act act indistinguishable as well. With both variations of this strategy, it is the sold strikes that create positive returns to the trader as those short options disintegrate in value over time.

The weekly options butterfly technique is a delta neutral strategy, meaning that market players who employ this strategy either dont have an judgement on marketplace direction or trust that the underlying being played will remain in its ordinary space on the price chart for the continuance of the trade.

When played in the approved manner, Weekly Options can be an enormously profit making, low tensity, and fairly nice trade that requires very little time and effort having to run.