This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Trading a Butterfly

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

WEBINAR: Volatility World Tour 01/10 at 6pm ET CLICK HERE FOR INVITE AND TO REGISTER

The butterfly strategy is one of the best ways to trade an expected sideways or neutral market outlook. The peak profit of the strategy is achieved at the central strike price of the technique. Let us first define what a butterfly is and then talk about how to trade it.

A typical butterfly might consist of the following trades.

Buy to open 1 February 80 call for $7.30.

Sell to open 2 February 87.5 calls at $1.81.

Buy to open 1 February 95 call for $0.09.

Note that this is not intended as a recommendation, rather a discussion of the strategy. The peak profit will be reached at the middle strike price of 87.5. Assume the stock is currently trading at about $86. Any possible loss will be strictly limited to the net debit we have paid to enter this position.

Our exit strategy will be to simply wait until the middle strike price is reached on the stock. So when the $87.50 stock price is reached we will be at the highest profit on the option strategy. Any move, either up or down from there will be detrimental to the option position. So as long as we have a reasonable profit in the position we will use our stop profit strategy to exit.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.



Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
Back to Nasdaq


Top Rated Stocks Top Rated Funds Top Rated ETFs