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Wealthy Option Traders
- Thread starter CandleStick77
- Start date
Quote from CandleStick77:
Could you give me some past example trades of butterflys? I have been looking for stocks that it would actually work on and can't seem to find any. They can be extremely profitable but having a hard time finding stocks that fit the criteria.
Okay, here is an example of butterfly:
Few weeks ago I sold RUT Jan 650/660 bear call spread for $1.25 credit. RUT was at 598. My plan was to sell OOM bull call spread on pullback. That pullback never came, and when RUT reached 640 few days ago, I was facing a dilemma. The 650/660 was worth around $2.5, and RUT was too close to the short strike. So I could cover the spread for $1.25 loss, or I could convert it to butterfly by selling 640/650 bull call spread for $6.5. I chose the second option.
I received total credit of $7.75. My maximum loss was fixed ($2.25) but I had a decent chance of at least some profit.
So today I took advantage of intraday moves to cover the butterfly. When RUT went down to 634, I covered the 650/660 call spread for $0.3. When RUT was at 644, I covered the 640/650 put spread for $5.1. My total profit: $2.35 on $2.25 margin (104%).
I think I was pretty lucky with this trade. I could hold and hope that RUT will go above 650 (in which case my profit would be 331%) but I never take settlement risk. No need to be greedy.
Quote from akivak:
Okay, here is an example of butterfly:
Few weeks ago I sold RUT Jan 650/660 bear call spread for $1.25 credit. RUT was at 598. My plan was to sell OOM bull call spread on pullback. That pullback never came, and when RUT reached 640 few days ago, I was facing a dilemma. The 650/660 was worth around $2.5, and RUT was too close to the short strike. So I could cover the spread for $1.25 loss, or I could convert it to butterfly by selling 640/650 bull call spread for $6.5. I chose the second option.
I received total credit of $7.75. My maximum loss was fixed ($2.25) but I had a decent chance of at least some profit.
So today I took advantage of intraday moves to cover the butterfly. When RUT went down to 634, I covered the 650/660 call spread for $0.3. When RUT was at 644, I covered the 640/650 put spread for $5.1. My total profit: $2.35 on $2.25 margin (104%).
I think I was pretty lucky with this trade. I could hold and hope that RUT will go above 650 (in which case my profit would be 331%) but I never take settlement risk. No need to be greedy.
Hey I am completely new to covering spread trades. Could you write out step by step how you covered your spread? I think they call that rolling out? What were the steps of covering that butterfly spread and why did you do every step? Thanks I appreciate it.
Itâs pretty simple. When you sell a credit spread (650/660 call for example), you are short 650 call and long 660 call. Since 650 call is more expensive, you get a credit. After time passes and RUT is below and far enough from the short strike (650), the value of the spread shrinks. When it shrinks enough so you make decent profit, you cover it by buying back the 650 call and selling 660 call. You do it as a single transaction. Then you cover the second spread (650/640 puts) by buying back 650 puts and selling 640 puts. Again, this is a single transaction.Quote from CandleStick77:
Hey I am completely new to covering spread trades. Could you write out step by step how you covered your spread? I think they call that rolling out? What were the steps of covering that butterfly spread and why did you do every step? Thanks I appreciate it.
Quote from akivak:
Itâs pretty simple. When you sell a credit spread (650/660 call for example), you are short 650 call and long 660 call. Since 650 call is more expensive, you get a credit. After time passes and RUT is below and far enough from the short strike (650), the value of the spread shrinks. When it shrinks enough so you make decent profit, you cover it by buying back the 650 call and selling 660 call. You do it as a single transaction. Then you cover the second spread (650/640 puts) by buying back 650 puts and selling 640 puts. Again, this is a single transaction.
Were you doing an iron condor and covering your positions? credit spreads have always freaked me out because of the amount of capital it could take from your account if it went against you.
Margin requirements for iron condor are actually lower than for naked options. If you sell RUT IC for $2.5 credit, your margin requirement is $750. If both spreads expire worthless, your return on margin is 33%. Probability of such return is pretty high (65-80%). Of course the trick is not to let the maximum loss to happen. This was exactly the reason why I converted it to butterfly when my short strike was threatened. I limited my maximum loss to $250 per spread and I had a decent chance of profit.Quote from CandleStick77:
Were you doing an iron condor and covering your positions? credit spreads have always freaked me out because of the amount of capital it could take from your account if it went against you.
Quote from akivak:
Margin requirements for iron condor are actually lower than for naked options. If you sell RUT IC for $2.5 credit, your margin requirement is $750. If both spreads expire worthless, your return on margin is 33%. Probability of such return is pretty high (65-80%). Of course the trick is not to let the maximum loss to happen. This was exactly the reason why I converted it to butterfly when my short strike was threatened. I limited my maximum loss to $250 per spread and I had a decent chance of profit.
alright let me think about what you said.
Quote from akivak:
Margin requirements for iron condor are actually lower than for naked options. If you sell RUT IC for $2.5 credit, your margin requirement is $750. If both spreads expire worthless, your return on margin is 33%. Probability of such return is pretty high (65-80%). Of course the trick is not to let the maximum loss to happen. This was exactly the reason why I converted it to butterfly when my short strike was threatened. I limited my maximum loss to $250 per spread and I had a decent chance of profit.
Could you explain step by step for me how you converted it to a butterfly when it was threatened? I think I just learned something very important from you. If a trader wants to be successful on spreads he needs to learn and master the art of rolling out to maximum his gains, and limit his losses. Am I right?
I described what I did few posts ago:Quote from CandleStick77:
Could you explain step by step for me how you converted it to a butterfly when it was threatened? I think I just learned something very important from you. If a trader wants to be successful on spreads he needs to learn and master the art of rolling out to maximum his gains, and limit his losses. Am I right?
Few weeks ago I sold RUT Jan 650/660 bear call spread for $1.25 credit. RUT was at 598. My plan was to sell OOM bull call spread on pullback. That pullback never came, and when RUT reached 640 few days ago, I was facing a dilemma. The 650/660 was worth around $2.5, and RUT was too close to the short strike. So I could cover the spread for $1.25 loss, or I could convert it to butterfly by selling 640/650 bull call spread for $6.5. I chose the second option.
I received total credit of $7.75. My maximum loss was fixed ($2.25) but I had a decent chance of at least some profit.
So today I took advantage of intraday moves to cover the butterfly. When RUT went down to 634, I covered the 650/660 call spread for $0.3. When RUT was at 644, I covered the 640/650 put spread for $5.1. My total profit: $2.35 on $2.25 margin (104%).
Quote from akivak:
I described what I did few posts ago:
Few weeks ago I sold RUT Jan 650/660 bear call spread for $1.25 credit. RUT was at 598. My plan was to sell OOM bull call spread on pullback. That pullback never came, and when RUT reached 640 few days ago, I was facing a dilemma. The 650/660 was worth around $2.5, and RUT was too close to the short strike. So I could cover the spread for $1.25 loss, or I could convert it to butterfly by selling 640/650 bull call spread for $6.5. I chose the second option.
I received total credit of $7.75. My maximum loss was fixed ($2.25) but I had a decent chance of at least some profit.
So today I took advantage of intraday moves to cover the butterfly. When RUT went down to 634, I covered the 650/660 call spread for $0.3. When RUT was at 644, I covered the 640/650 put spread for $5.1. My total profit: $2.35 on $2.25 margin (104%).
You sound like you know what your doing. Would you be interested in mentoring me for a while?