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.
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.
Butterflies are perfect when traders want to minimize risk but are willing to cap the potential profit.
Until next time,
October 21 2022