Trading Butterfly Spreads - YouTube

hey this is danielle and i'm the director of  options at simpler trading and today we're  

going to be talking about one of my favorite  options strategies which is called the butterfly  

so butterflies are one of my favorite  strategies for a couple different reasons  

number one i love the low cost so typically  a butterfly is going to cost anywhere between  

half or even up to a fourth of what a long  call would cost you so if you have a setup  

like this one right here that you want to trade  you see some consolidation you think it's going  

to break out and you're trying to decide well  how should i trade that should i trade it with  

a long call should i trade it with stock or should  i use a different option strategy like a butterfly  

and you're looking at what you can afford for  your account a butterfly is typically going to be  

you know a half half the price of a long call even  up to about a fourth of the price i guess down to  

um so that's one of the main reasons why i like it  one of the next one of my next favorite aspects of  

the butterfly is because of the risk to reward  okay risk to reward on a butterfly is absolutely  

critical and this is how i'm really able to grow  small accounts so when you're getting into a trade  

and you're looking at risk versus reward  if you are risking three to make one  

how often do you have to be right okay just  think about that and let's say you're wrong  

three times in a row and you risk three to  make one it's really really hard to get ahead  

in that type of risk reward parameters however  with a butterfly it's the opposite so you're  

usually risking one to make three all right or  you can even risk one to make five or you can risk  

one to make ten so um for me number one the  low cost number 2 the excellent risk reward  

are two of the primary reasons why i like trading  a butterfly now what is a butterfly you may ask  

well a butterfly is going to be a multi-leg option  spread that you use when you have a directional  

setup so for me i'm a directional trader i love  trading consolidation breakouts and trending  

charts so for me a butterfly is a great strategy  to utilize so what i look for is i look for  

some consolidation and then i look for a breakout  all right so crm this is one of the tickers i've  

been trading and then what I do is I go through  my options and I say all right how do I want to  

trade this I know this is a setup here I think  it's going to break out I use a lot of Fibonacci  

so I draw my levels here and then I get a  price target I had a price target of 200 and  

then a secondary price target of 210. This  one right here is going to be resistance

resistance and this one's going to be the  primary target all right but in using butterflies  

um the best part about it is you can target this  first and then you can target this second and you  

can kind of stack them up and that's how what  i like to do so when you're thinking about you  

know why you would use a butterfly after you have  a directional setup step one you have to have a  

directional setup okay set up a reason to believe  a ticker is going to go higher this is mine in crm  

i've got the consolidation consolidation and  then boom it broke out today that's great  

after that you have to have a target right  target because with long calls you don't  

necessarily need an exact target  but with butterflies you do  

so with the butterfly i get my target from my fib  levels i have a previous area of resistance and  

then i have a full target fibonacci one two seven  two extension then you also need a time frame

if you're going to trade with  butterflies because you need to  

know about how long it's going to take you to  get in or be in the trade so in this example  

i was trading crm trading it to 200 and then 210  so i'm going to show you just a couple different  

butterflies i had on so if i would have traded  this with a long call i would have done it with a  

delta 70. about 18 days is a little bit short  honestly probably would have done it about 25  

days out so let's just see what that would have  cost me if i would have done it that way instead  

um so if you go down here into your options chain  and you see delta 70's right about here that would  

have cost me about thirteen hundred dollars for  one single call okay just just for one long call  

now instead i decided to create a  butterfly and my butterfly cost me 1.97  

which is 197 and i ended up doing two of those so  it was about 400 bucks instead of spending 1300  

now when i'm working on growing small accounts you  can see where this would be very very beneficial  

you had a cost basis of 1300 you slice  that down into two bucks i mean that's  

that's just a huge difference in price here now  the other thing that's great about butterflies  

is that typically with these directional  setups you can get really good percentage  

wins here so i paid two bucks this is already  up to three dollars and 38 cents per contract  

so as far as you know growing a small account  um you know you really want to be focusing on  

trades where you can get 50 to 100 winners  and when you're just trading long calls  

typically for at least the type of setups  that i trade i'll get anywhere between 50  

25 to 50 on long calls kind of on a regular basis  and they're more expensive so your percentage that  

you the percentage that you earn when you're right  is less right the percentage and it costs more  

with the butterfly the percentage that  you earn is much better and it costs less  

so that's why i prefer to use a lot of butterflies  now the problem with butterflies can be the  

targets okay so you do have to be pretty good  at technical analysis or at least learning from  

somebody who's pretty decent at it so a butterfly  is a multi-leg option strategy where you have  

long calls in your first leg short calls in  your second leg and this is for a bullish setup  

and then you have long calls in your third leg  and so basically what this does is it creates  

a target for you okay so imagine it like this  let's go back to the other screen 190 200 210  

so a butterfly is essentially just imagine that  you're looking at a dartboard okay and you have um  

a range here on your dartboard  okay one two three just like this

and the butterfly with the center strike  

is going to be right here all right so let's  say you have a long call plus one right here  

then you have two short calls in the middle it's  the center strike it's going to be 200 price point  

and then let's say your 190 price point is right  here and then your 210 price point is right here

so you have a target zone  

that you're trying to hit okay and i got into this  trade last week when this was trading down at 185.  

so we're trading down here at 185 and i say to  myself hey you know i think it's going to trade up  

into this zone what's the best way for me to trade  that well i'm going to spend two bucks and i'm  

going to try to get 50 100 on my money in a couple  days by using a butterfly where i'm targeting  

the 200 price point now you may ask well what  happens when it goes above it because it did  

i went a little bit above it right well there's  two different things i can do for that number  

one i'm about to take this trade off i just  went ahead and wanted to make this video  

before i took the trade off but um it will go  a little bit against you once it goes through  

that center strike you can do one of two things  you can wait until it comes back or you can just  

add another one at a higher price point when  you take this off so for example on this trade  

i have one that's targeting 200 and then i  stacked another one on here that's targeting 210  

so i have this fly that i paid only a dollar  45 for that's 145 and it's already up a dollar  

um so that's pretty pretty decent um and the best  part about that is it can go it can continue going  

up even higher because we still have some more  room to run now i have a couple other butterflies  

on here microsoft is another one that i used for  a directional setup so microsoft again had this  

pullback and some consolidation right here and  it was heading up to this 220 price point now  

today is a pretty extreme example because you  have microsoft up 5.59 percent which is just  

huge microsoft doesn't normally move that much in  one day we also have crm that was up four percent  

so it's a pretty big um range today but it was  the same setup so i had a directional setup  

i used this butterfly because i had a pullback i  had this consolidation i had a fibonacci area of  

support and i was looking for a breakout  from the setup to my specific target so  

i came in here and i said you know i want to  target the 220 price point and instead of paying  

twelve dollars and fifty cents i'm gonna i'm  gonna pay five dollars and seventy one cents  

and then i'm gonna get about a one to four risk  reward on the trade and i'm gonna try to get a  

double out of it so right here i mean it's really  not even bad just as it is it's already up 50  

because it's already up three bucks and i put this  trade on i don't know maybe two or three days ago  

so 50 is not bad i mean you can take those  all day long on these types of trades  

but i do usually try to get a little bit more now  for another example here's netflix this is one  

that i don't have it set up on yet but i wanted  to set it up on here and so just to show you an  

example you know here is the here is the  setup you have the squeeze which is showing  

consolidation you have the turbo vzo which is  showing you consolidation you have a bit of a  

cup and handle pattern here you pulled back to  the 34 ema and now you're kind of flipping up  

and when i throw my targets on here you can see  that i have a couple different targets number  

one i'm targeting resistance so there's  an area of resistance right here at 550  

and then i also would like to target this area up  here now this is what i call the easy target zone  

easy because typically in any directional setup  you're at least going to come up and you're at  

least going to come up and you're going to hit  this area of resistance so i typically like to  

target that zone first so if you look at netflix  it's trading at 500 bucks today i have a target  

of 550 so how do i want to trade it well we  do the same analysis again we come um in here  

and we say all right well a delta 70 call is  going to cost me 3500 do i want to pay 3 500  

and potentially sit through a lot of volatility  in netflix or do i want to try to make a cheaper  

um cheaper trade that's going to have a much  better risk to reward all right well i want to  

make a cheaper trade that has a much better risk  to reward because that's how i grow small accounts  

so i'm going to go down here and i'm going  to click on 550 because that's my target zone  

and i'm going to click on buy and then i'm going  to click on butterfly all right and so remember  

what i told you before a butterfly is a target  imagine you're looking at a dart board if you're  

trying to hit this tiny little circle right  in the middle how likely is that isn't it more  

likely that you hit a much bigger circle so you  want to try to make your zone as wide as you can  

just depending on what you're willing to pay so  you know that's the main question i always get how  

wide do you make them well you make them as wide  as you can afford it so i'm trading here with a 20  

000 account usually i try to make um trades about  five percent of my account something like that  

but it also just depends on how many other trades  i have on stuff like that so 25 wide for 2.75 is  

great i mean if you look at this risk reward here  you have a 500 risk and 4 000 almost almost 4 500  

reward okay and that's for two contracts it's just  uh automatic um counting or the automatic quantity  

i have in here so that's awesome you could also  make it even wider make it 50 wider or make it  

50 wide because then you have a bigger target  okay so now what does your risk reward look like  

well this trade and since i did two contracts you  know it'll cost you 2200 bucks for a max profit of  

700 7 700. now keep in mind with the butterfly  this is the max profit okay if your max profit  

is risk one to make four you're going to get those  one out of fours every now and again but the ones  

that you want on the regular basis are going to  be the 50 100 winners okay you know times two  

is is pretty good and if you go down and if you  look at you know i just stack these on top of each  

other like adobe it hasn't really taken off quite  yet this one we're just still waiting for it to go  

i have a couple different other  strategies here i have a put credit spread  

i have a couple different butterflies here  and here i also got one on tesla right here  

and then i also have some long calls too so  i do trade long calls i try to do them on a  

little bit of these cheaper names like workhorse  like peloton but i mean that adds up you know  

it's three thousand dollars so when i'm looking at  these type of strategies the reason why i do this  

is so that i can grow um so i can grow small  accounts so i mean this account i grew from six  

thousand dollars and now we're sitting up here  at 20k so that is why i trade with butterfly  

um because when you can kind of add this  strategy into also using these long calls  

you know you have a conservative strategy that is  pretty cheap and it's not also the other benefit  

it's not going to be as volatile so you know today  we have a big update in the market um if we do end  

up kind of pulling back here in this market then  these butterflies because they have a short strike  

higher up here um the best part about that is that  it that short strike will go in your favor if the  

market starts pulling back so you're not just long  a long call you're also short these guys right  

here so because this is a multi-leg options spread  you have multiple different options that can go  

either for you or against you of course but  if you know how to use it when the stock price  

goes up your 525s are going for you okay because  you're long and as long as the price stays below  

your short options right here at the 550  strike price i guess i should put two  

right here shouldn't have as long as price stays  below this um these short strikes you're making  

money on this one right here because you're  long and you're making money on theta decay  

on this one because you're short so these options  decay over time so you make money on that leg and  

then you make money on this leg as price goes up  now the other reason why i love these is because  

if price just kind of trades sideways and goes  like this you're still making money on this side  

and this side will hold up relatively well  because it's in the money usually not in  

this example it's not in the money but oftentimes  when i do these i'll do them so they're just below  

being in the money they'll get in the money  pretty quickly and then that way the lower  

leg holds up really well so i think that's how  i did a couple of these other ones in here so  

um you know for example this microsoft one  this one's in the money so you have a 200  

strike right here you have a 200 strike right  here and now this guy is uh 17 bucks in the money  

so that's going to hold up really well  and uh yeah so anyways this is how i trade  

this is how um i like to grow small accounts this  is also what i do in the simpler trading options  

room and i also have my own trade alert service  as well so if you're interested in learning more  

about those you can go to simplertrading.com  join and you can also go to simplertrading.com  

profits and that is where you can  learn about my trade alert service  

where i teach butterflies and all these kind  of strategies that i just went through today  

so i hope you learned something in  this video give me a thumbs up or  

comment below if you have any questions and beyond  that i hope you have a fantastic rest of your day