Breakdown: Picking the Right Cash Zone

Recently, I touched on why I like trading butterflies and how I use them…

I use butterflies on the SPX and XSP same-day expiration plays.

Butterfly

A butterfly is a combination of a bull spread and a bear spread where the sold strikes overlap in the middle –

For this strategy, a trader will buy one lower strike, sell two middle strikes, and buy one higher strike.

So for a call butterfly for example, you’d buy one call at a low strike, sell two calls at the middle strike, and buy one call at a higher strike, all on the same stock and same expiration date.

The area between these long strikes is what I like to call the cash zone.

When I execute butterflies in SPX and XSP, I determine the middle strike based on where I think the stock will land at expiration and the low and high strikes are typically the same amount away from the middle strike for a balanced butterfly.

Here’s how I pick the cash zone.

Butterflies are perfect when traders want to minimize risk but are willing to cap the potential profit.

I talk a lot about butterflies here and in the live room… and I have even dedicated entire shows HERE and HERE to breaking down what’s so great about this strategy and why and when I use butterflies.

Until next time,

Mark Sebastian

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