Butterflies Making Targets

Hey traders!

This week in the Options Gold room at Simpler Trading, we have been focused on a few key tickers, including GOOGL, MSFT, NVDA, ADBE, and the SPX. I talk about these setups during my live trading room sessions, post charts, and setups, and walk through my live trades.

I had long positions in Google and Microsoft while waiting for better entries with an edge in Nvidia and Adobe. I hesitated to place more long positions considering the extended market before yesterday’s sell-off, but I still wanted to be long GOOGL & MSFT. MSFT is still holding up very well, considering yesterday’s action, and I continue to like the long setup into the end of December and January.

Trading Google

Yesterday, Google hit my $140 price target, and I took 46% profits before the market took a turn for the worse. But, you know what was great about that? My Google fly was a little strong yesterday morning, and it was going through the center strike at $140.

When that happens with a butterfly, the fly will start going against you, and you will start losing some of your profits. So, when the market sold off, GOOGL came back below $140, which was even more beneficial for the trade. Today, it’s still sitting directly at $140. So, even if I hadn’t taken them off, it would simply be maturing even more.

Check out a screenshot of the setup before it took off…

And, look at GOOGL now:

Using Technical Analysis to Structure Butterflies

I used 135/140/145 butterflies in the options market for this trade setup. So, now that Google has hit the first price target, I am out of those flies!

The next target is between $147-150, so let’s call it $145 and $150. Sometimes, people ask me why I use targets that end in 0 or 5 and say I’m ‘simply counting by fives.’

Well, let me tell you why my targets are big round numbers. I’m using technical analysis, which combines moving averages, previous highs and resistance zones, Fibonacci levels, and options data. I look for high open interest and volume in specific options strikes. I overlap this information and then set up my options trades using those price targets.

In options trading, it’s important to use key psychological values, otherwise seen as ‘counting by five’ because those are the strikes that are the sticky points. The target zones the market seeks out, especially near Friday expiration. This is why they should be used as price targets. Sure, you can use $146.94 if you’re trading long calls, but when setting up multi-leg strategies like spreads and flies, you must use round numbers with a lot of activity if you want enough liquidity and want to pinpoint profit targets.

Hedging with Flies

Butterflies are also a great way to hedge when the market rolls over. I used a $25 wide butterfly targeting 4700 in the SPX for a day trade yesterday. Now, I don’t normally day trade, but I didn’t have any TV shows I was doing yesterday, so I figured, why not?

This butterfly worked really well to hedge as the market was falling, and I was conservative with my exit – unfortunately for me. I ended up getting about a double on it, when this butterfly would have pinned perfectly if I waited another 8 minutes. Such is the life of a day trader!

What is a perfect pin, you ask? Well, a perfect pin is when the ticker lands at the center strike (your target zone) right when the options are expiring. This is how you get full, max profit on a butterfly. Now, I don’t normally aim for max profit, as I generally aim for 50-75% profits as this is a conservative way to trade, but of course I will take a max profit when I get one.

Unfortunately for me, I got out a little too early on this one, but it was a real nail-biter!

In this example, I was targeting 4700, but I decided to take almost double when I had it.

8 minutes later, as the market continued falling apart…look at the ‘mark’ price on this fly…it went from $9.72 to $26.80 after I paid $5.35 to get in. I guess I should daytrade more often!

I am showing you this example because it answers questions I get all the time about butterflies. I’m glad I made a little bit of money, but I am still a little bitter I didn’t wait another 8 minutes. But, it’s okay…until the next time! I trade in a more conservative way for a reason, but I still wanted to demonstrate what is possible with a butterfly and what can happen when it pins.


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