Buying a butterfly with as the middle strike, say the call butterfly, can be a capital-efficient way to take advantage of an anticipated move. Sometimes, a butterfly is inexpensive at initiation, especially if the underlying is far from the midpoint. Iron condors and butterflies are sort of in the same family, and have similar risk profiles. Not investment advice, or a recommendation of any security, strategy, or account type. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.
Butterfly Spreads in Commodity Options
Clients must consider all relevant risk factors, including their own personal financial situations, before trading. Please note that the examples above do not account for transaction costs or dividends.
Orders placed by other means will have additional transaction costs. Market volatility, volume, and system availability may delay account access and trade executions. Past performance of a security or strategy does not guarantee future results or success.
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Butterfly Option
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Key Takeaways A butterfly option spread is similar to an iron condor, but with a couple key differences A butterfly can help you profit if a stock hits your target price within a certain time frame Learn the maximum risks and potential gains of a butterfly spread.
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Butterfly (options)
You are now leaving the TD Ameritrade Web site and will enter an unaffiliated third-party website to access its products and its posted services. A key point to remember when trading butterflies is that maximum profit is always when the price of the underlying, in this case SLV, is at the short strike at expiration. By remembering this fundamental characteristic, an option trader can center the butterfly on his projected price target in order to maximize profit.
Another fundamental characteristic of the butterfly construction is that this structure usually works best in an implied volatility environment that is in the upper half of its historic range.
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What is the reason for this characteristic? The options we sell short in the center of the butterfly represent a major profit engine for the structure. How does the butterfly under discussion fit into the volatility consideration? Below is the volatility chart for SLV. The brown line is the volatility actually demonstrated in the market recently, and the blue line is the implied volatility calculated from actual option trades.
As you can see, we are currently in the mid range of volatility for this underlying. Successful option traders understand the limitations and advantages of the vehicles available to them. Jones of OptionsTradingSignals. Get an edge on the markets with our daily trading newsletter, Trading Insights, and receive timely trade ideas covering stocks, options, futures, and more to keep you on the right side of the action.
From trading basics to advanced strategies and high-probability set-ups, the insights you need from our all-star lineup of trading pros is delivered straight to your inbox. The stock market offers virtually any combination of long-term opportunities for growth and income, as well as short-term investments for trading gains. Click to Enlarge Successful option traders understand the limitations and advantages of the vehicles available to them.
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