Make Money With Options Trading Butterfly Spread

By Mitch Greenberg

We know very well that option trading is about maximizing every potential investment. It is establishing that position, wherein you as a trader get tricky and witty with stock price trends. It is known that there are about a number of trading principles adopted and the options trading strategies butterfly spread is one of them.

Many traders view this strategy as complex. On the other hand, many players still consider this concept as a valuable trading practice. Generally, profits are generated when the long butterfly spread is used and such can be done by means of purchasing call options at both low and high strike price, and shorting these two calls.

The options trading strategies butterfly refers to the combination of two transactions- buying a call option at a low strike and buying another call option at a higher strike. The key here is to affect these transactions and ensure that both options bear the same expiration dates.

The so called butterfly is hereby created using the following figures:

Long 1 call at (X-a) strike

Short 2 calls at X strike

Long 1 call at (X+ a) strike

For some traders, the only concern regarding the options trading strategies butterfly is the amount of involved commissions. Others even remark that the butterfly spread is perhaps the priciest among option strategies and principles. It is also noted that stockbrokers are the ones benefiting greatly from this type of spread, since their ulterior motive is to increase their commission.

On the contrary, other traders believe that the only way to earn money using the butterfly spread is by means of establishing option positions. While this objective proves to be difficult, using the butterfly also means bringing in greater risks but with higher results. The fact that the options trading strategies butterfly entails six commissions is indeed one hard feat to produce. Still, a trader's success using the butterfly lies in his capacity to trust his brokers, maintain his trading position and eventually generate revenues.

In the long run, the butterfly spread is one kind of strategy that is regarded neutral. Simply, it is a combination of the bear and bull spread. While others view this strategy as limited, the trader's ability to determine and make use of striking prices is likewise inevitable. As always, the options trading strategies butterfly utilizes three striking prices and it can be done using both call and put options. In the end, when an investor feels that the value of the underlying stock has poor chances of increasing or decreasing, then that's the time wherein he can make use of the butterfly spread.

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