Managing Butterflies

Hey traders!

Thank you so much for all of your feedback on my last newsletter!

I received a bunch of emails and got a ton of great ideas. Overwhelmingly, the most requested topic was butterflies, with a little bit of earnings.

I had one question that I wanted to go ahead and respond to with a newsletter, with plans for more videos later on.

The question was:

Can you do a video (or video series, for that matter) on how to manage butterflies, or other options strategies (e.g. verticals) especially if/when they go against you? For example, say I place a 5-day expiring (call debit) butterfly because I think the market is going up. However, over the next day or so, the market instead tanks. How can I manage the trade to mitigate losses; or hopefully even better, is there a way to trade/manage it into a potential winner? 

Want to learn more about butterflies? Click on the image above!

Here is my response:

In general, with a butterfly, the best defense is starting the trade so that it’s in the money. That way, when the market pulls back, it doesn’t lose as much value. If you start off the trade so that it’s at the money or out of the money, it’s a lot cheaper but it loses value very quickly if the market goes against you.

 

I do place at the money flies, when the market is in a strong trend. If I’m wrong and the market pulls back, and the setup is still working (i.e. there is consolidation but it hasn’t broken out, versus consolidation broke out the wrong direction), then sometimes I will add another butterfly at a lower level that can capitalize quicker when/if the market begins to go higher.

 

You can also add another fly with a different expiration date. Let’s say for example the market pulled back and now your butterfly probably won’t hit a target in time. You can set another one at a lower price target with a farther-out expiration date, and close the loser or wait to see if it will come back.

 

Closing vs. waiting depends on your initial risk when you got in. Sometimes, I will target a 50% stop if I’m wrong, but most often I am risking the full debit and not taking a stop. So, if it’s down, I simply wait and if it loses money then I already risked the debit and was comfortable with losing it.

 

I hope that helps, but I will definitely make some videos!

 
 

 
 

 

Up Next...

A Sorely Needed Pullback…

Hey traders! The market is finally pulling back today after what has been a phenomenal run. While pullback days aren’t very enjoyable when you’re long, ideally, you’ve been taking profits on the way up and trimming positions at market extensions. As I was on vacation, I have been flat, minus a small position I entered … Read more

Read More

Top Hot Zone Tickers Today…

Hey Traders! I’m back from vacation and ready to locate some setups. Whenever I come back from a break, I have a regular process I do to identify spots to focus on. It goes something like this… Start with the major indexes (Nasdaq, S&P) and the Magnificent 7 stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, … Read more

Read More

Happy 4th of July!

I hope everyone is enjoying their summer so far and looking forward to the shortened week! If you’re here in the United States, I hope your holiday is safe and enjoyable. I will personally be taking some time off this week to spend time with family and enjoy the holidays. I love cooking with my … Read more

Read More

Subscribe Today!

Want my up-to-date analysis, setups, top trading tips, and more? Be a Five Star trader, and join my free newsletter today!

Sign Up Now
all-as-seen-on-logos