Why Oh Why, Unbalanced Flies
I remember when Henry first started talking about the unbalanced fly — it went right over my head. I thought, “Well, that’s a great strategy for someone like Henry, who’s been doing this twice as long as I have, but it’s too complex for me!”
Thankfully, he didn’t stop talking about it, teaching it, and encouraging our traders (and me!) to learn and use this more advanced options strategy.
We taught a class together at the Trader’s Expo in Las Vegas, where we built these three strategies on top of each other — put credit spreads, regular butterflies, and unbalanced — and even through the process of putting together and teaching that class, it further cemented my frequent use of this options strategy.
At this point, it’s one of my favorite options strategies to use, and I want to walk through my Costco analysis from earlier this week, along with my earnings trade, and the follow up…
Let me first start off by saying that trading earnings isn’t for the faint of heart.
On the negative side, it’s a binary event. While you can use statistics and technical analysis, these types of trades are less probable than regular, high probability setups.
The great thing about them, and the reason why I do them, is because they come to fruition quickly — for better or for worse. That can mean either a max profit or max loss, overnight. When you get good at them, and you can add them into your trading skill set, you can have 5-10 regular swing trades on that you hold for 2-3 weeks. Then you can add another 5-6 earnings trades per week. This can really add another skill set to your repertoire.
The Unbalanced Fly
The reason why the unbalanced fly is great is because you can use your technical analysis abilities to select a specific support or resistance zone, and then use this strategy to max out your potential.
Let’s say you think a stock will hold a certain level after an earnings report, and you want to sell premium to take advantage of the IV crush. Naturally you think… put credit spread.
I started off trading earnings by selling put credit spreads.
I like to do these at the money for a 1:1 risk/reward ratio, but the problem is, the stock better go up on the report… or you’re going to have a max loss overnight.
By adjusting this way of thinking, you can place an unbalanced butterfly. The best part? You can select a lower area of support than the strikes that are currently at the money. You can often get a better than 1:1 risk reward ratio, and you can pick certain obvious support zones to place it at.
It also only holds risk in one direction.
The main reason why it works is because you have a multi-leg option strategy, which means you have the basics of options working for what you ultimately want.
In Costco, my analysis told me it’d likely go lower on the report. Therefore, I bought a +1/-3/+2 unbalanced put butterfly directly before the report. I selected the strikes like this:
The area of support I was targeting was $290.
This is why the short strikes are placed there. In a perfect world, if COST falls to $290, that’d mean the $290 puts I sold expire worthless (and those were originally $1.98 a piece), and the $290 put I bought for $3.82 could be worth a max of $5.00. That’s where the profit comes from.
Getting into the trade for a $-.32 credit means I didn’t pay anything to get into the trade!
I got in for a credit! No debit = no cost to get in, and only a cost to get out if you’re wrong, and it falls through the $290 strike.
Here’s what one contract looks like:
The way this works is when the ticker falls into your area of support, you make money on the long puts.Then as you get close to expiration, the short puts decay — quickly.
They’re great for earnings trades because they come to fruition quickly. However, of course, they can also turn to a loss quickly — so it has to be within your risk parameters. This was a small trade, with just one contract, but it worked out just as planned.
P.S. We also did the same setup on AVGO for earnings at $315.
These were trades I placed in my Stacked Profits Mastery Program. If you want to check it out, I’m going to be having live trading on Monday from 10-1pm. If you want to join, now’s the time!
Also, tell Henry thanks for teaching me, and all of us, this great strategy! If you want to learn more, check out his class on unbalanced butterflies in the Simpler Trading store.