In this analysis, we present trade ideas for butterfly spreads with puts that have a maximum return of at least 100% with a maximum stake of $ 182 per contract if the underlying stock moves sideways. The terms of the options are short: The butterfly spreads expire on October 22, 2021 at the latest.
The candidates for the butterfly trade ideas: Strict criteria for the selection
In this analysis, the candidates for our butterfly spreads had to go through very strict criteria in order to even be shortlisted.
Only stocks of companies or ETFs were considered for which the average options trading volume is at least 10,000 contracts per day.
The spread between the bid and ask price of the option combinations should not exceed $ 0.25. This ensured favorable conditions for entering the positions.
Quarterly results may not be published during the term of the butterfly spread. Quarterly results can lead to unpredictable high price movements, be it up or down, which would be detrimental to a butterfly spread.
The maximum risk of loss should remain below $ 200 per contract.
The maximum possible return should be at least 100% if the price of the underlying share has not changed or has hardly changed by the expiration date.
The duration of the trades should be a maximum of 30 days.
The result of our analysis for the butterfly spreads with puts
After applying the above criteria, there are currently 3 possible butterfly spreads that stand out, which meet the strict conditions of a potentially successful trade:
- The price of the share is the closing price on September 24, 2021. This price will of course change during the course of the trading session. For example, if a stock has risen in price, an investor could consider the next higher strike price.
The analysis was carried out in such a way that the option combinations trade at the midpoint between the ask price and the bid price.
The stake per contract corresponds to the maximum possible loss. This value as well as the maximum profit and the maximum return are snapshots in this table and change every second.
But be careful: Although the butterfly spreads presented here seem particularly promising, this does not necessarily mean that the trades will be successful. It is possible, for example, that company-specific events influence a share in such a way that its price falls or rises sharply, which could lead to the butterfly spread slipping into the red. A general rally on the markets or a correction in the stock exchanges can also pull individual stocks up or down.
Among the identified candidates, we take a closer look at Chevron (US ticker: CVX). With a stake of $ 182 per contract and a maximum return of 175%, a butterfly spread on CVX has particularly attractive properties. This maximum return is achieved when CVX shares are trading at exactly $ 101 on the expiration date. The relatively short term until October 22, 2021 does not give the stock too much time to move away from its current price. If the trade idea works, an investor can look forward to a high profit of a maximum of $ 318 per contract. If not, losses will be limited to $ 182 per contract.
This maximum loss arises only when the share falls below or exceeds the base price of $ 96 or $ 106 at the end of the term.
In the trading platform, you would trade this butterfly spread at around $ 1.82. With a contract size of 100, the above cost is $ 182. Of course, this value also varies every second. Prices between $ 1.64 and $ 2 represent a tradable range. If the stock has moved up or down in the meantime, consider entering the trade with strike prices adjusted to the current price of the stock .
CVX’s stock has rallied sharply for a few days. If it remains in a narrow price range until October 22, 2021, the butterfly spread presented can produce a very high profit.
The break-even point for this butterfly is between approximately $ 97.82 and $ 104.18. These prices are marked by the blue corridor in the upper chart. If the CVX share is quoted in between on October 22, 2021 (right end of the blue lines), the investor is in the profit zone. Losses occur outside the blue corridor.
CVX can move up by 3.6% or down by 2.8% in the next 25 days (duration of the trade) without a loss in the butterfly spread.
Principle of the butterfly spread with puts
With the Butterfly Spread option strategy, you combine 2 sold puts at the money with the purchase of 1 put out of the money and the purchase of 1 put in the money. All options have the same expiration date. The risk of a butterfly spread is limited to the stake: There is no obligation to make additional payments. The profit potential is enormous, but the probability of winning is usually low. The strategy only works if the underlying stock moves within a certain price range.
When entering the position, a “limit order” is recommended. An investor can try to get in at the mid-price between the bid price and the ask price. If the entry to this price does not work, this limit price can be gradually adjusted until the entry takes place. In this way, the entry conditions can be easily improved.
The position can be closed early at any time during the term, be it to take profits or limit losses. It makes sense to aim for a profit target, for example 50% of the maximum possible profit.
Very important: A butterfly should always be closed before the expiry date of the options in order to avoid exercising when the short or long puts expire. If the share price trades below the strike price of the short puts one or two days before the expiration date, there is a risk of the short puts exercising prematurely. Should an exercise take place earlier during the term, it is recommended that the entire position be closed (sale of the booked shares and settlement of the remaining puts).
Even when closing, an attempt should be made to exit at a mid-price between the bid price and the ask price.
The expectation is that the stock will stay near the strike price of the sold puts for as long as possible. In this way, the profit potential of the position would develop quickly. The share price may in the meantime deviate from the base price of the sold puts during the term of the position, but must return to the base price in a timely manner in order to generate a profit.
It doesn’t matter whether you trade a butterfly with calls or puts. The risk-return profile is identical.
This is how you can find the necessary options in your trading platform
Several roads lead to Rome to trade a butterfly spread. In our video you will learn how you can find the appropriate options using the OptionTrader of the trading platform. If you use the OptionTrader’s StrategyBuilder, you can trade options with just one trade, you do not have to trade them individually: you can trade options combined with a single transaction, both when opening and closing the trade.
Conclusion: 3 butterfly spreads with small stakes and large chances of winning
With Butterfly Spreads you know immediately when entering the position what the maximum profit and the maximum risk of loss will be. Return and risk are clearly defined and limited. The maximum profit is achieved when the stock moves sideways, with a certain safety cushion up and down.
The 3 candidates presented here were filtered out of an entire universe of several thousand possible butterfly spreads with a maximum duration of 30 days. The extremely strict filter we used in this analysis left space for very few attractive trades.
Even these trade ideas should be treated with caution. The price movements of the underlying stocks remain unpredictable and can break the safety cushions of the butterfly spreads. With a butterfly spread, the risk-reward ratio is very often “all or nothing”. With short terms, the trader knows very quickly whether he will make a high profit or whether he will lose his stake. Profit goals between 30% and 50% of the maximum profit and a stop loss at 50% of the maximum loss are possible management methods to trade the butterfly strategy.
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