Options 101: Butterflies | Danielle Shay (04.12.21)

[Music] hey this is danielle shay and today we're going to be going through butterflies 101. so i'm danielle shea like i said i'm the vp of options at simpler trading you can find me in our trading room i also have my own options picking service and i'm a frequent guest in the media cnbc fox business and of course stock charts so today we're going to be talking about butterflies we're talking about butterflies because well i love butterflies and it's one of my absolute favorite strategies now normally at any given time i would say around 60 or so of my physicians are going to be butterflies now people always say why do you do that well there's a couple different reasons number one when i started off trading i was training with a small account there was a lot of different tickers that i was not able to buy directional long calls on just take amazon google netflix tesla for example one single long call on any of these tickers is going to cost you thousands of dollars and it's going to be incredibly volatile as well so what i wanted to do was i wanted to figure out a way that i could trade options where i could get in at a reasonable price point have a great risk to reward and still be able to trade directional moves because i love trading directional moves that means i'm looking for the stock to go from here to here and i wanted to find a way to capitalize on that now because of all those reasons i started learning how to trade butterflies and now it is it's really my number one strategy so this is what we're going to be going through today so really these are going to be my secret weapon when it comes to growing small accounts people will always ask me too well can i use this with a larger account of course you can use it with a larger account but the reason why i like these in particular is because i can put on trades for as little as 50 cents a dollar a dollar fifty that's going to be as low as 50 okay now normally my trades aren't that small i generally do keep them around anywhere between five dollars to about 15 which is going to equate to 500 to 1500 per contract in the options market but just know that with the butterfly strategy what you're doing is you're essentially cutting down the cost of your long haul significantly and because of that you can put on trades for you know 50 to 100 so that's one of the primary reasons the other reason why i like butterflies is because they hold their value really well through volatility a lot of people they get into the options market and they just cannot believe how quickly options move now with a butterfly strategy because you have multiple legs that means that you're going to be long and short at different strike prices at the same time they're going to hold up a lot better through volatility that's because if the market's going down it's not really going in your favor you do have a short strike that's working for you even though your long strikes may be working against you so it does tend to hold up a lot better especially in some of these crazy market times um typically with these trades i get about a one to four risk reward ratio that means i'm risking one to make a maximum of four now depending on how you set up your butterflies um that can be more and it can be less you can risk one to make a maximum of two you can risk one to make a maximum of 25 it just all depends on how wide your butterflies are if they're in the money if they're out of the money but the moral of the story is is that this strategy is open to a really wide range of traders because you know some folks might like to do really wide fly that's a little bit more expensive that has a little bit more profit potential and some folks might like to do a smaller butterfly that is going to cost less and it has less profit potential but once you learn how to use the strategy you can do it however you want so the main reason and the main way that i trade these is going to be in a directional manner now a lot of people come to me and they say that they've been following someone else who trades it in a neutral manner everything that i do is directional so here's just an example of a way that i'm going to place a butterfly um so let's pretend that your current stock price is right around here and i'm looking at a trending chart okay that's because i pretty much always trade with the trend there are some exceptions to that of course depending on volatility but let's just pretend you're looking at a trending chart so on a trending chart you're gonna have you know price pulling up pulls back on a dip and then it goes up to a new extension for those of you who use fibonacci extension targets this is a pretty typical way to look at a way that you would determine fib targets you know you have a previous high you have a dip this would be a hundred percent move uh then you have some resistance and you have a full target up here so essentially what i'm doing when i'm placing an option straight like this is i'm using a multi-leg strategy it's called a multi-leg strategy because there's going to be more than one leg on a long call for example you would really just buy one long call and people will either do that at the money out of the money or in the money but once you buy that long call you know you're you're spending a debit and well you just gotta wait and see if it works when i i do buy long calls but i really only do it maybe like 20 to 30 percent of the time because i find that the multi-like strategies work a lot better the majority of the time there are moments in time where you want to buy a long call for example when the market's really strong to the upside but for the most part i find that butterflies are gonna work a little bit better the majority of the time so for example let's say uh this is let's say it's tesla okay let's say we're looking at tesla and tesla's right around seven hundred dollars now let's pretend we wanted to buy a 700 call okay that call is going to be incredibly expensive i can actually go to my options chain right now and see what it would be let's just use next week for example so a long call on tesla right at this moment in time and take my drawing tool off here so a long haul on tesla just right at the money at the 700 strike is gonna put you back about twenty six hundred dollars a contract so pretty pricey right it's gonna be expensive but if you have a larger account you can do it not so if you have a smaller account so one way that you can make that trade a lot cheaper and be able to get into it is by creating a butterfly so what you do is instead of just buying the 700 call you create a butterfly where you have one 700 long call then you have two short strikes higher up on your options chain and you have another long strike up here what this does is it creates a strategy where you are paying a debit for the 700 but then you're selling two higher calls up here you're doing it in the same expiration series they're just going to be further up the options chain so they're going to be out of the money when you sell those two calls what you do is you bring down the cost of this debit because you're buying this for debit and selling these for credit now the third piece of the butterfly is the leg that's up at the top so you do want to add that third strike because that is how you get a defined risk strategy you can leave that strike off but then what happens is you're long one and short two and you have unlimited risk to the upside which is not something that i want to get into so by placing another strike right up here at the top you are now long too and short too but the idea is that you're short these two strikes that are ideally going to stay out of the money you're picking a long call that's ideally going to gain in value you're picking two short calls that are ideally going to decay over time therefore making you money and this one is just the third strike that you're adding for protection so basically when you're setting up a butterfly like this normally how i set up my butterflies and i do them in a variety of different ways people always email me and say well which is it is it in the money is that the money is it out of the money my answer is that it just depends it depends on what the price of the butterfly is um it depends on how directional i am with something like tesla typically what i do is i'll get into an out of the money butterfly the reason for that is because they're expensive but in the money calls at the money calls are expensive so for example on this tesla fly that i just entered i think i got into it on friday uh i think tesla was trading around 675 at the time and basically what i did was i looked at my chart here and what i'm looking for is i'm looking for a target zone to the upside because your center strike needs to be right around a target zone and you want the top you want the ticker to go up into the zone but not through it so essentially i was looking at the fact that we have um a squeeze here which is a consolidation setup that's about to break out we also have volume that's coming into the stock we also have a key psychological value right here that is just above where we're currently trading so what i decided to do was i decided to get in to a bullish butterfly on tesla i bought the 700s i sold the 750s and then i bought the 800s now today tesla is up what 3.4 and so what's happened is that i paid 8.65 instead of paying 2600 and i now have a butterfly that's up what almost three bucks or so and the idea is that as tesla trades into the 750 zone that butterfly will just continue to mature or kind of go up in value so right now i mean i just put this on there one of the main reasons why i put it on is because it has earnings coming up and tesla has a statistical likelihood of trading higher going into this earnings report i also put that on because the nasdaq has been breaking out so we had the nasdaq that was consolidating and then boom all of a sudden we had a major tech breakout going into the core of tech earnings so i'm going to show you a couple other trades that i put on um with these butterflies so for me i always use them as a directional trade um you're gonna have to ask somebody else if they use them in a neutral manner i know people will use them for example really wide on the indexes and just wait right around the center strike while price just chops around that's just not what i do um i do it just like this okay so i'm looking for a ticker that's likely to move i i need for it to have a range that's going to trade into so i need price to be away from the range that i think it's going to get to that's what makes it directional so if we're trading down here i've identified a range up here i want the stock to go from here to here so that that long call on the bottom is gonna rise going into that stacked profit zone and ideally that center strike stays out of the money so you also need for price to be away from where you're targeting so people will always ask me hey danielle apple's trading at 135 can i make a 135 butterfly not in the way that i trade it because you're already at your target zone if however you said hey danielle apple's at 135 and i'm targeting 150 is that a good butterfly i would say yes if you're you know targeting a higher area and you have a confluence of a technical setup along with some targets now apple right now is a little bit it has already broken out so i'm not actually going to put that trade on just trying to give you an example so you also need to identify a key area of resistance because you don't want that fly to trade up through that area of resistance and that area of resistance is typically going to be your price target so how do you place the trades well i use a combination of charts and then options chain as well so the first thing that i'm looking at is going to be my charts i need my chart so that i can identify the key target zone or else i don't have a trade right so on my charts i'm going to use fibonacci analysis key moving averages squeezes which are consolidation breakouts volume and top down analysis so to identify my trades normally i'm going to start with the overall indexes and then i'm going to narrow that down and say okay which sector is likely to break out okay i think tech's likely to break out going into earnings okay let me trade tesla and apple amazon so that's what i mean by the top-down analysis so the technical analysis is going to be coupled with factors in your options chain it seems complicated but it's really not that hard because once you learn it they start to just stick out to you like a sore thumb so we're looking for key psychological values any big round numbers we're also looking for high open interest this is just demonstrating there's a lot of action at that option strike and we're looking for the expected move is it reasonable for that stock to get to that price by the expiration date that we have selected so these are typically the values that i look at on my options chain um i have delta strike in the money at the money calls or puts implied volatility volume or open interest so here's just a couple examples of trades that had on this week um i was looking at apple and i was looking at apple for the potential for it to break out above the 50 simple and above this key area of resistance and i had identified a target zone um up here at about 1 35 i also have my hot zone tool that demonstrates that apple typically does break out higher prior to its earnings report so i went ahead and placed a butterfly targeting this 135 zone on this chart you can see a little bit better the areas of resistance that i've drawn those are fibonacci areas and basically i was betting on it sticking within the 132 to 140 range so when you look at the options chain it becomes a lot more clear because you can see that there's a ton of call volume happening right here at the 135 strike okay you're looking for a strike that has you know three times the normal volume than all the other strikes so i went ahead and set up that butterfly this one was super cheap and the reason why i did this one so cheap was because it was more of a lotto trade um i don't normally like to get into breakout trades because i like to get in before the breakout that's how i get a much better risk to reward so when i'm trading a breakout i will do it kind of cheap so this trade was only 69 bucks per contract um and i ended up getting out of that for uh two and a half times you know the debit that i paid so apple did end up breaking out and along with it went amazon so amazon was one that i wanted to trade as well i used um these fibonacci levels up here 3300 and 3400 and overlapped those with those key psychological values and went ahead and put two different trades on this one for amazon so on amazon when you can see this is what eventually happened this chart is just from right i just took the screenshot right for this presentation but basically it traveled right up into a key area of price resistance it was very close to that 3400 price point i think the tick was actually like 98 or something like that so you can check that out that just happened today but the way that i traded it was with two different butterflies so i had one butterfly you can see down here it was 50 wide so it was 32.50 3300 and then 33.50 so i put this on when this strike was out of the money and i just waited until it traded up into my middle zone and you know i got in for 6.90 got out for 9.80 so i was about a 50 winner so not bad normally on calls i'm looking for like 25 to 50 and butterflies 50 is kind of the low end of the range the reason why it wasn't more was just because it still had um some time left on the trade so i had a 3300 fly and then i also had a 3400 fly so this trade i just took off this morning got in for 323 out for 457 and that was only i was only in there for two days but again it was an overlap of that key psychological value with the fib level now you might ask well how could you make more money on it well the way that you make more money on it is you get the price directly to that center strike the day of expiration and that's what we would call a perfect pin now one criticism that i always get from people is they say oh you're never going to make money on a butterfly unless you get it to the exact date and the exact time well i've done it a couple times i mean usually every other month maybe every third month or so i'll get a perfect one which is amazing because if you get that that's when you buy something for 323 and you can sell it for 50 bucks those are huge trades but you don't need for that to happen to make money on it all you need is for the price to come up into your range so for example the range was 33.60 to 3400 so you can still make money in like 50 to 100 200 winners i mean it's nothing to sneeze at even though of course getting in for three and getting out for 50 would be amazing um you know what we're looking for is regular study winners so essentially when you're looking for a butterfly to make money you want it to trade up into that center strike which is what i like to call the stack profit zone you can widen your butterflies out however you want um typically on the water on the larger stocks i'm going to make it a little bit wider sometimes like on apple you saw that butterfly was pretty tight the smaller they are the cheaper they're going to be and the harder it is to get it to that center strike because your range is smaller the easier it's going to be easier the more it is and the wider your range is so i get this question a lot as well you know hey danielle how do you close your butterflies well usually i use a couple different variables number one in the amazon and apple examples um i close it when it gets to the center strike because that's the target if you don't close it when it gets to the center strike and like let's say that you still have two or three weeks on your trade the more likely scenario is that it's going to blow through your center strike and then that's where you can start losing money so the way you're going to lose money is either a if your butterfly doesn't ever move from a to b your debit is just going to decay or b if you actually put your center strike a little bit too close and the ticker trades right through it so for that reason i like to close them when they get to the center strike i also will close them if it's a double or triple because well i mean why not you need to take your money off the table so there's going to be times where you know i have a trade on and it's not quite to my center strike yet but i have a double or i have a triple so i'm going to take my money and run um i will also close them if i had a stop loss level so sometimes i'll use a 50 stop on some of the larger flies but the smaller flies i usually just let them ride and if and if it doesn't work out then i will end up losing my debit um and then the last reason that i will close it is if it's running out of time and it's just not going to get there in time so what has happened some lately especially in the volatility if you place a butterfly right out of the money um and then the market pulls back well now you have something that's really out of the money so if you need to close that out and place another one with a lower target then you can also do that so the moral of the story is that the butterfly formula is pretty simple you got to pick your stock you need to find a directional setup that means you need to have a reason that you think the stock is going to move you need to identify key levels of support and resistance be thoughtful of your time frame and select your strikes using your options chain so there are going to be times where i do not use butterflies i don't use them when there is not enough liquidity in the strikes some people will say hey you know there's no contracts here or the spreads are really wide well it's because you can't use a butterfly then so you do really need to stick with liquid stocks especially stocks are highly traded in options market um if i can't get one about three weeks out i don't usually like to do it because i'm a shorter term momentum trader i like my trades to last anywhere between one day and three weeks so if you're asking me about a target on john deere that's out in july it's just going to take forever for that butterfly to mature you can definitely do it if you're a longer-term trader but to me i get a little bored so i like to get those in and out trades all those moves that last in less than three weeks so you can also skip a butterfly when a debit spread would be the exact same cost the reason why you're doing a butterfly is so cheaper to begin with so if you're doing a butterfly and you have a long leg here and then you have your short legs here and you have another long leg here and your fly is going to cost the same as a debit spread there's just no reason to do the butterfly instead um i also never place them the same week of earnings because you don't want to place them in a rising volatility environment because the short strikes will start to go against you and you don't want to place a butterfly when your price is already too close your where your target price is too close to the price that the stock is currently trading so if you want to learn more you can find me in a variety of locations i have a free newsletter 5startrader.com you can also follow me on twitter if you have any questions from this presentation you can tweet me at trader danielle i'm pretty active on there um i do also have my own options picking service where i post tons of butterfly trades it's called the stack profits mastery which i'm sure you can also find on my twitter or simplertrading.com and you can find me here of course so if you want to learn more i did just do a free webinar this is the link to it you just go ahead and type that in to your chrome or whatever platform that you use for the internet you can find a one hour long recording of a free webinar that i actually just did last wednesday and this includes a ton of different trades that i'm looking at primarily focusing on the run into earnings so it's really awesome thank you so much stock charts for having me again you can follow me on twitter at trader danielle and that's about it thank you very much hey grayson rose here with stock charts thank you so much for watching i hope you enjoyed that video if you did consider giving it a like down below maybe leave us a comment and if you're new to the channel you can subscribe at the link up above we're gonna bring you daily content from an incredible collection of technical analysts and financial experts

Channel: StockCharts

Views: 5,776

Rating: 5 out of 5

Keywords: stockcharts, stock charts, stockcharts tv, stock market, trend following, trend following strategies, market analysis, stockcharts.com, technical analysis, investing, trading, stock trading, stocks, stock analysis, chart analysis, swing trading, risk management, options market, danielle shay, directional butterflies, risk to reward, percentage gains, calls and spreads, stock options

Id: Z81HrEcRcMo

Length: 25min 42sec (1542 seconds)

Published: Mon Apr 12 2021