Broken Wing Butterfly Credit Spread Options Trading

everyone arjan here so we love our vertical spreads they've been a great strategy and our options toolbelt and we're going to discuss a different type of a credit spread called the broken wing butterfly now we're skipping over the regular butterfly because the broken wing butterfly can be constructed as a credit spread meaning we're not paying a debit to enter it and so I'll go over that and the first half of this video I will just discuss the mechanics of the spread and in the second half of the video I will go over our strategy and a couple of live trades let's recap what we know about the vertical spread because I think that that will help you understand the butterfly a little bit better so we know that in a vertical spread we are selling an option and then buying a further out of the money option and as a result we are opening this spread for a credit so we are sellers and we receive a credit for opening the position of course you can do this on the call side where you're selling a call and then buying a further out of the money call and as a result you receive a credit for doing so and I just want you to visualize what the relationship is of these strikes to the app the money strikes in the butterfly you still have that vertical spread there and now we're gonna sell another strike in the middle and buy a closer to the money strike so as a result this is what it looks like it's buying one option that's close to the money selling two of the same strikes in the middle and then buying one that's further away from the money now in this example I've skipped one strike I skipped at the 3050 strike and bought the 30 45 but you can skip and sometimes we'll skip two strikes and then buy the 30 40 so when we do this we are buying for credit okay so we're not sellers of the spread we are buyers also I just wanted to notate the racial here a butterfly will always be a one to one show so if you wanted to do two butterflies it would be to four to three butterflies 3 6 3 etc if you use the thinkorswim platform this is how you'll enter the trade you just head to the trade tab type in your ticker choose the expiration date then scroll down and find the stripe that you will be going short and just right-click it tap buy and then butterfly and by default you will see that this the wings are equally distant from each other so find the further away from the money wing and then skip one or two strikes and doing so should give you a credit here and so yes you would send the order with a negative sign in the front of the price and of course if you wanted to sell more than one butterfly this is where you increase them and the call side is the same so buy butterfly find the further away from the money strike and skip oops try that again 31:55 so you'd go down to 31 60 or 31 65 and find that credit if you are a member of our room we post these in a copy and paste format so you should be able to highlight the trade right click copy come back over to your trade tab find this little clipboard tap it and it should enter the strikes in there as we've entered them with the whatever limit price that we had set I noticed that for some reason this posted a negative one in the middle to change that just hit custom not sure why that did that and then make sure that the ratio is one to one so you should always be short to in the middle that's how you do that okay like a vertical credit spreads these have a similar market Direction assumption so when you are bullish you buy a put broken wing butterfly when you are bearish you put on a call broken wing butterfly okay I'm putting an example up here in the top right of what an order would look like for a put broken wing butterfly and I'm gonna lay out what the ideal scenario would be at expiration now I say ideal because this is what's most probable to happen but not exactly the max profit either so if you put on this trade and thinkorswim and you took in a dollar credit for it ideally alts for all strikes work will expire worthless and you simply keep the hundred dollars okay so this is what it looks like on an option chain there's your three strikes highlighted in yellow so long as SB x in this case closes above thirty sixty-five and all your strikes expire worthless you simply keep the $100 let's talk about the best scenario at expiration so this would be your max profit if you're looking at this order a close between 60 and 65 the higher of your two strikes and it puts put broken wing butterfly would be your max profit so this is what it would look like on the option chain a closed right between 60 and 65 so in this example your 30 45 and 30 60 would expire worthless you would keep the hundred dollars that you received it open and the value of the 30 65 put that is now in the money so this is obviously difficult because you have to pin the closing price and this is what your worst scenario would look like your max loss so a close below three zero four five your lowest strike in that butterfly would mean that all your strikes end up in the money and you have your max loss you'll have to ignore the colors of the option chain here I was just trying to visualize what all of your stripes would look like in the money okay I'm not sure if it helps to look at it this way and maybe this is something that you can screenshot so if you were to enter a put broken wing butterfly you can simply look at it like if it closes above my highest strike I keep the credit received if it closes in between my closer to the money strikes I make my max profit etc and I made the same sort of screenshot able layout for a call spread because it's the opposite now to calculate the margin requirement you're gonna take the width of the wider wing and you'll minus the credit and that's how much capital your broker will require from you to put on the trade so the more that you break the wing the more capital it's gonna require from you but of course that's more credit you can take in and then your breakeven is calculated by taking your short strike those ones that you sold in the middle and - sing the credit okay and if you're in thinkorswim if you just print or screenshot the order confirmation dialogue before you submit your order all the calculations will be there you'll see your breakeven max profit max loss and your buying power effect which is how much capital you need to put on the trade okay I didn't discuss earlier that a closed between your wider strikes that expiration would result in basically slightly less than your max loss so I put it up here but you'll have to know what your breakeven is and you'll lose $100 for every point past your break-even point okay all of the previous scenarios describe the profit or loss situation at expiration now at expiration means actually holding the broken wing butterfly until the market has closed so our strategy will involve entering the broken wing butterfly on the day of expiration and not necessarily holding all the way until the markets closed so we're going to look to exit whenever we have a profit and we'll look to enter when we're at the high of day and put on a call broken wing butterfly or a broken wing butterfly at the low of day a couple things to keep in mind when you enter the spread for a credit you don't have any risks to one side so your trade is purely directional and you're looking for that bonus when you pin the close price but you still have to be right about the direction I don't want you to want you to think that just because you're opening the trade for a credit that doesn't mean that you can lose money you still need SPX to trade in your direction and it still needs to stay above your higher strike if you're in a put or your lowest strike if you're in a call so your trade will not be green until it does that and also since we're putting these on on a zero days to expiration your profit zone is really dependent on decay so you won't see it go green until either the last 30 minutes of the trading day or that there has been that much volatility where you know SPX has moved into in favor of your butterfly and the premium prices have decayed I'm going to use thinkorswim on-demand feature and kind of go over our most recent trades so I'm going to copy the trade from Friday June 5th and kind of hopefully help you understand what this looks like when we're in a live trade so I've set the on-demand to I think about 10 minutes before Rick entered this trade and I think I'll I just give you my opinion of why maybe he entered this trade so we're a couple hours into the trading day I'm sorry on the bottom it's Pacific time but on the top it's Eastern Time so here's where SVX is trading and as you can see since we were approaching high of day or we're here now at high a day and sort of expecting the reversal right so it to pull back and trend down we come over to the trade tab and I've already copied it from the discord room and I'm hitting the little paste clipboard here and here's the strikes 3232 Oh 5:30 2:20 on the call side right so we're a little bit out of the money right now but I believe when he entered the trade that 3200 was in the money okay so I'm just gonna set the treat now so that it fills when it hits his fill price which was $2.00 so this is what your order should look like right here is the negative credit one to one ratio I'm not sure how many butterflies he entered but I'm just going to use one for this purpose hit confirm and send send it come over to the monitor tab and we can kind of see it working here and we'll go back to the chart and kind of watch it so let me fast forward this a little bit we can kind of see here's about its pre buffering so give on-demand a second to catch up with the data so our order has filled and it filled higher than what I entered it for that's just because it's this on-demand feature anyways actually I think a couple of our members did bail higher than the alerted price which was $2.00 which is fine of course and we'll kind of watch it to see how it moves throughout this trading day of Friday so of course we're bearish right so we want SPX to stay down but not too far down because we want it to kind of expire somewhere in between here so if we closed right now where these positions are it would be perfect right because these two would expire worthless and we would simply keep the value of this one stripe so it would be $500 plus the 295 that we took in of course it's not there yet because the premiums have not decayed enough so let's just go back to the chart but you can see that your position is profitable now because there's been enough 2k there and we're still trading you know in in this range right here okay I'm going to fast-forward to closer to when we exited the trade which was about three o'clock Eastern so let's go there let it buffer and you can see that this is about where we entered right before it reached hi a day that's when we got bearish and it continued to go down a little bit and then trade sideways which was fine for us so this is a few minutes before we exited let me let this catch up a second okay so now it's caught up and we're here trading at 3200 and you can see that now the profit is pretty close to our credit price what we took in and that's because that these contracts have decayed enough you can look in here on the option chain and kind of visualize where your positions are going okay so Rick was now looking to exit the trade one because it's profitable and because since we were a bearish and this was Friday and there was a potential for a volatile spike up we didn't want our higher strengths to get challenged so we just looked to exit at this time so to exit the trade if I hadn't gone over this earlier in the video you're gonna hit right click create closing order tap the first one to sell and then what we ended up closing it for was 15 cents so I'm just going to enter it like that hit confirm send send it filled right away so as you can see that's what we ended up closing it for I think at 301 is when we actually exited this account or this trade because we didn't want to be in the trade for that last 30 minutes and the potential for the spike up so yeah that's what that trick looked like during the day decay really helps these butterflies and hopefully that helped I'm going to recreate that last trade and kind of show you what would happen had we not exited and let all the contracts expire worthless so I'm back to in the morning a few minutes before we alerted the trade I'm going to paste the exact trade here highlight right click copy paste the trade we're looking to enter for two dollars hit Send I might fast forward the video here until this order fill so that I can show you what it filled out and then what it looks like when it expires worthless so I killed another butterfly and this one filled for two dollars and 40 cents and now I just want to show you how do we not exited what the profit would have looked like so I still again got in right around here filled the butterfly for two dollars and 40 cents and in the real trading day we exited sometime over here because we were anticipating this volatile spike up and we didn't want this leg right here to get challenged so we ended up exiting taking a decent profit but this is what it would have looked like had we not exited and we would have just let the butterfly expire worthless so the market just ended on this on-demand feature it's pre buffering so give it a second here and then we'll go back and look at the monitor tab to look at what the PNL looks like okay so now it's caught up you think okay the market is closed here we closed [Music] 3194 some thing let's go back here 3193 is where we closed at and so we simply kept the original credit that we filled for so that's how that works hey everyone so I hope that helped you understand the strategy a little bit more I've watched a lot of YouTube videos over this and I have not seen anyone use it on a same day expiration strategy or even a one day to expiration strategy so we found that in this current market it seems to work well and we have a longer window to exit with a profit than we do the vertical spreads and we seem to have been able to capture a better premium for a little bit less capital than our typical vertical credit spreads also I did not go over what a stop loss should be so a good rule of thumb to stop out of this trade would be when the underlying reaches your breakeven price so thank you for watching if you have any questions please comment down below or if you're a member of our room please feel free to direct message me anytime we're happy to feed you trades all day long but it's really important to us that you understand the strategy and understand the methodology so that you can look to enter trades on your own as well and hopefully with other tickers so thanks again for watching

Channel: Axe Options

Views: 13,696

Rating: 4.9072165 out of 5

Keywords: options, 0dte, spx, sp500, daytrade

Id: 4puQtdyMbjU

Length: 19min 9sec (1149 seconds)

Published: Sun Jun 07 2020