Butterfly Course Part 13 – Trading Weekly Double Butterflies


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Read Part 1 – The Basics
Read Part 2 – How To Set Profit Targets and Stop Losses
Read Part 3 – How To Successfully Leg Into A Butterfly
Read Part 4 – Trading Rules
Read Part 5 – Using Low Risk Directional Butterflies
Read Part 6 – The Greeks
Read Part 7 – Broken Wing Butterflies – One-Size Fits All
Read Part 8 – The Reverse Butterfly
Read Part 9 – Using Butterflies In A Combination Or As A Hedge
Read Part 10 – How To Protect Against Fast Moves
Read Part 11 – The Bearish Butterfly
Read Part 12 – Adjustments!

Weekly options have become increasingly popular in recent years. In this chapter, we’ll be looking at how to trade double butterflies using weekly options.

Using double butterflies to trade weekly options can work really well if you like the idea of a “set and forget” strategy. With short-term butterflies you can enter trades relatively cheaply, particularly if you move further out-of-the-money. By using a double butterfly, you don’t care which way the underlying moves, as you are creating profit zones to the upside and downside.

To set up the trade, you place a call butterfly spread above the current market price and a put butterfly spread below the current market price. A good guide is to have your short strikes centered just outside a 1 standard deviation move in the underlying instrument. I like to initiate the trade anywhere between 7 and 10 days to expiry.

Generally this will be fairly cheap to set up. The reason I called this a “set and forget” strategy, is that once you put on the trade, you leave it until expiry (note you should only do this with European style Index options). This helps reduce commission costs and slippage as there is no exit for the trade. As the trade is cheap to set up, you are willing to accept a 100% loss on the trade.

Here’s an example of how you set up this trade:

Date: August 6th 2013,

Current Price: $1698

Trade Details: SPX Weekly Double Butterfly

Buy 1 SPX Aug 15th $1625 put @ $0.80

Sell 2 SPX Aug 15th $1650 puts @ $1.80

Buy 1 SPX Aug 15th $1675 put @ $4.80

Premium: $200 Net Debit

Buy 1 SPX Aug 15th $1725 call @ $1.60

Sell 2 SPX Aug 15th $1750 calls @ $0.35

Buy 1 SPX Aug 15th $1775 call @ $0.10

Premium: $100 Net Debit

Total Premium: $300 Net Debit

At the time of trade entry, a 1 standard deviation move would have put SPX at 1665 or 1731 at expiry.

Here’s how the profit diagram looks. Note that the trade is risking very little capital and there are two very nice profit zones to the upside and downside. You will profit anywhere between -4.10% to -1.50% and +1.80% to +4.30%. If you got lucky and SPX settled at 1650 or 1750, you would collect a nice profit of $2,200.

SPX ended up settling at 1657 for the August 15th expiry. The call butterfly expired worthless resulting in a loss of $100 while the put butterfly made a profit of $1600 thanks to the long 1675 put and short 1650 puts. Overall the trade made $1500 in profit for a return of 500%.

This won’t happen every week of course, but this is a nice profit for a low stress, inexpensive trade. You only need to a have a winning trade every few weeks to make it worthwhile.

You can also increase your chances of success by waiting for 1-2 quiet weeks of less than 1% movement before initiating the trade. This gives you a greater chance that the index will move the required 1 standard deviation.

  1. pete says:

    Thanks for the article. But how to choose strikes for this kind of trades? Furthermore, to reduce commission fees, could we just buy weekly single out of the money calls and put options instead? Or could one just buy weekly strangles? Thank you very much!

    1. Gavin says:

      Hi pete, I like to place them around 2% away from the current price, provided the cost isn’t too high. You could just by straight calls or puts, but it will cost a lot more.

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