Yesterday afternoon, I went live with Kenny Glick to trade the close.
From 3:30 – 4:30, we talked shop, handed out trade recommendations, explained how to put on a butterfly spread, shared a mutual dislike for UVXY, and goofed around through it all.
For those who attended, make sure to sign up for Kenny’s eLetter and get even more daily trades from the VWAP.
Those who didn’t attend? You can watch a replay of yesterday’s event right here – it was a hit.
But we won’t be one-hit wonders. I have a feeling yesterday’s session won’t be the last time Kenny and I get together for a “double the expert, double the trades” live session.
Now, we had a vast audience turn up for the event. And to everyone who joined, I hope you had as much fun as I did. But there was no way to get to every question that filtered through the chat.
I don’t want to leave anyone high and dry. So for today’s Q&A issue, I pulled a couple of questions directly from the chat during my session with Kenny.
Today, I’m talking butterflies, UVXY, and Ford.
Get all the answers right here…
Kenny and I kicked off yesterday’s trading session talking about the Amazon of China, Alibaba Group Holding Ltd. (NYSE:BABA).
We each gave our own ways to play the ecommerce stock. I recommended a three-leg trade called a butterfly.
Now, this was a short-term play for yesterday afternoon – one I wouldn’t recommend putting on today. But a butterfly is a great trading strategy to have in your trading arsenal, so Lauren’s question is one I’ll answer for all:
A butterfly spread is an options strategy that combines a pair of credit and debit spreads using either calls or puts, typically involving four contracts instead of two. It’s a great strategy to use when you’re neutral on a stock and don’t expect to see too much movement on the underlying.
To execute a butterfly, you buy options at lower and higher strike prices (think of a butterfly’s wings) and sell (to open) options at the middle strike price (think of a butterfly’s body).This makes a three-legged spread. All of the options in the spread will have the same expiration date, but each leg will have different strike prices.
So, you will have a low strike put (or call), two middle strike puts (or calls), and one higher strike put (or call).
Now, you will buy the lower strike and the higher strike, while simultaneously selling the middle strike. The catch with the middle strike is that for every contract you buy on the bottom and the top – you sell one in the middle.
For instance, if you buy one contract at the high strike price and one contract at the low strike price, you’ll want to sell two at the middle strike. This allows you to create an incredibly inexpensive trade setup.
During yesterday’s trade-the-close session, I recommended the BABA August 20 $155/$145/$135 butterfly put spread. This means you would have bought to open one $155 put, sold to open two $145 puts, and bought to open one $135 put simultaneously.
Now, I’m here to bring Wall-Street level profits to the common man. That’s why almost all of my Profit Takeover trade recommendations will be straight calls or puts. But if you want to level-up your trading arsenal, then a butterfly spread is a great way to do that.
While we’re on the topic of puts, let’s talk about the true dumpster fire that is UVXY…
Here’s the thing about UVXY – it’s built to drop.
It follows the movement of the VIX, sure. So it can go up over short periods of time, like it did this week, popping 17% from Monday’s open to Thursday’s close.
But in the long run, UVXY is owned by the VIX term structure. That’s what dictates the direction of the ETF.
And when the VIX curve is in contango, like above, it puts pressure on UVXY to drop.
Over the course of a year, UVXY can lose 80-95% of its value. So I’ll always be long-term bearish when it comes to this ETF – that’s why we have a long-term put in the Profit Takeover portfolio right now!
One name that we won’t have in the portfolio anymore after today’s expiration is Ford Motor Co. (NYSE:F). And here’s why…
F dropped and dropped quickly. I’m not going to sugarcoat it – we missed it here.
But hey – that happens. You can’t be right most of the time without being wrong some of it. That’s why allocation is so important – so that a single trade doesn’t wreck a portfolio.
We may have missed on this one, but we’ll make up for it (and then some) in the future, especially with new trade ideas in your inbox every single day.
If you have a question that I didn’t answer here, then send me a message right now using the Ask Me Anything form on the Profit Takeover website.
You can always join any of my live trading sessions as well, if you want to get on-demand answers to your questions in real time.
Have a great weekend,
One response to “How to Execute a Butterfly Spread”
August 20 2021