There are three main parts to understanding how to trade butterflies on SPX and XSP: 

  1. Prepare your trading account
  2. Understand the butterfly setup
  3. Take profits home

It’s that simple.

Today during the live Profit Takeover show, I broke down this information.

If you missed me live, watch it all right here…

But here’s everything you need to know about those three topics:

Open a trading account that works for SPX expiration.

Make sure your broker has good customer service and will work to get your account set up. There is a possibility that your current broker won’t allow SPX trades, so you may want to call them to be sure.

You also need to get the proper clearance to trade butterflies and spreads, which is usually a level or two above trading calls and puts. 

Ironically, trading spreads is much safer than trading naked calls and puts…

For example, the benefit of trading naked calls is upside potential, but the disadvantages are unlimited loss on the downside, limited gain on the upside, and tax issues. 

The benefits of trading SPX expirations are high upside potential – up to 9x your price! And these options are cash-settled, meaning you are not assigned stock at expiration but instead the cash goes into your account. And the downside is limited – you can only lose what you pay for the trade.

Give your broker a call and make sure they can set you up to trade SPX and XSP.

You may need to ask what the specific ticker would be too, for example:

Fidelity: SPX

Schwab: $SPX

Tradestation: $SPXW.X

TD Ameritrade: $SPX.X

ThinkorSwim: SPX.X

Etrade: SPX or $SPX

Next, you need to understand the butterfly setup.

I say this every day to new members learning to trade SPX: 

Learn SPX butterflies by trading in a paper account.

Your broker can help you get set up with a paper account that doesn’t have real money inside, so you can get the hang of entering and exiting these SPX butterflies. 

It’s not that tricky once you learn, but you do NOT want to risk real money while you are learning because it can be easy to make mistakes in the beginning. 

Here’s the anatomy of a butterfly trade:

A butterfly is a combination of a debit spread and a credit spread where the sold strikes overlap in the middle.

And the good news is, you can learn these trades like a skill – and you can take time to practice them in a paper account so you DON’T have to risk your hard-earned cash as you get comfortable. 

When I send out the butterfly trades live during the Expiration Trader show, they look something like this: 

I also post the BREAKDOWN to show exactly what this butterfly trade means:

For these butterflies we buy one of the first strike, sell two of the second strike, and buy one of the third strike, and these are always debits. 

That’s how we create the butterfly:

The ways that people tend to make mistakes in the beginning are either choosing the wrong date or being impatient on a fill so they pay more than what the trade is worth. 

Luckily, by the time I send out these trades, we still have about an hour and a half for them to fill and if they don’t by 3:30 pm ET, I always remind people to cancel their butterflies so they aren’t filled if the trade starts to go the wrong way. 

The last – and arguably the most important part of trading butterflies – is taking home your profit.

Once you are FILLED on your trade, you can set up your exits. I post exit recommendations based on buying in quantities of four. 

But if you just buy one, I recommend selling the whole thing between 150%-200% profit if possible. 

But once you are able to buy four, take a look at the sample trade above.

If you were filled at $1, you can set your exits…

You’d sell two of your flies at $2, one at $3, and let the rest ride into the close. 

Of course you don’t have to exit your trades this way, but that’s my recommendation.

I’d love for you to be there for our next live show and practice trading these butterflies in real time. 

Sign up right now to be there for our next Expiration Trader show at 2:00 p.m. (ET) today. 

You’ll be a butterfly trader before you know it. 

I’ll see you then,

Mark Sebastian


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