Introduction to Butterfly Spread Trading
A rookie trader may use the butterfly spread to maximize profit and minimize risk. The butterfly spread and its benefits will be discussed in this article.
Butterfly Spread?
Butterfly spreads employ three strike prices for low-risk, limited-profit positions. It is neutral when asset prices are predicted to remain stable. Butterfly profit/loss graphic names this strategy.
Butterfly Spread Parts
1. Buying ITM call options
2. Sell two ATM call options
3. Buying OTM call options
Use these choices to create a time decay and volatility contraction strategy.
Butterfly spread works how?
Imagine a constant stock price in the future. Butterfly spreads include:
1. Buy one ITM call option with a below-market strike.
2. Sell two market-priced ATM call options.
3. Buy OTM call options with higher strike prices than the market.
Options you buy protect you from price volatility, while those you sell generate income. Butterfly spread profits are highest when the stock price remains around the strike price at expiration.
Butterfly Spread Gains
1. Low Risk: Butterfly spreads are ideal for beginners. Most lost is trade setup charge.
2. Less cash: Butterfly spreads cost less than stock purchases or sells.
3. Profit Potential: Butterfly spreads may make big money if the stock remains around the strike price. Profit is greatest when the stock price hits the middle strike price at expiration.
4. Time Decay Reduction: Theta decay may help butterfly spread techniques. Time decay might benefit you if you sell expiring options.
Conclusion
Butterfly spread options trading is lucrative and low-risk. It requires less money and regulates trading, making it suitable for beginners. You must understand the approach and its components before trading.
References and sources:
1. Investopedia—https://www.investopedia.com/terms/b/butterflyspread.asp
2. Options Education: https://www.optionseducation.org/strategies/all-strategies/butterfly-spread
3. CBOE—https://www.cboe.com/options/strategies/basic/butterfly-spreads