Butterfly Spread: Churning Out Monthly Cash Flow
A great tactic for income traders who think the stock or index they’re trading will most likely stay contained within a range for the short term is the butterfly spread .
This strategy is a theta positive trade as it generates income from the passage of time as the option that are sold in the position decay over time. As long as the underlying vehicle doesn’t move too far in either direction or just as long as the price of the underlying winds up at or near the sold strikes of the position on expiration day, this trade will profit.
Here is a trade illustration of this strategy:
Buy 5 contracts of QQQQ 44 put. Sell 10 contracts of QQQQ 46 put. Buy 5 contracts of QQQQ 48 put.
These trades can generate quick gains for the investor due to the fact that the short strikes of the position (the strikes which are sold) deliver so much premium into the traders account for the reason that they are being sold ‘at the money’ - which are the strikes that have the greatest amount of time premium in them.
While you can find numerous mutations of the butterfly spread, the two most popular are the standard butterfly distribute which is traded for a debit, and then there’s the iron butterfly, which is put on for a credit. It is true that these two individual versions of the butterfly spread are indeed different, if you would look at the risk graph of one and then compare it to the other, they would look exactly the same, and they actually perform the same as well.
The butterfly method is a ‘delta neutral’ trade, meaning that investors who use this technique either don’t have an opinion on marketplace direction or believe that the underlying being traded will remain in its general vicinity on the price chart for the duration with the trade.
When traded correctly, the butterfly spread can be an extremely profitable, low stress, and enjoyable trade that requires very little time having to manage.
To find out more about this strategy, visit this Butterfly Spread Training Website for tons of free training videos, examples, and reports on how to correctly enter, exit, manage and adjust these trades to generate a consistent monthly income.