The power of the fly

What is it that you’re struggling with? Is it seemingly out of nowhere news, the technical patterns, or is it your use of setups and strategies? 

Over the course of the last few weeks, we’ve spoken frequently about overall market analysis, tips, tricks, travel stories, and more. So, I wanted to take a few minutes to drill in and give you an example of what’s working for me in this market right now.

Let’s dive in…

I’ve gotten a lot of emails, comments, and questions from traders who are struggling with the current market conditions. They always go something like this:

“Hey Danielle! I’m really struggling. The setups and strategies that I’ve always used haven’t been working very well in this market. I like to buy long calls, on nice, trending charts. What should I do? Every time I seem to get in, some news hits, and the market goes the other direction! What should I focus on?”

It’s in this type of situation that I like to do a few things.

Number one, I always cut down on my trades and risk. That is first and foremost. Secondly, I adjust my options strategies and setups. I use smaller targets and less risky strategies that enable me to get a solid risk/reward. 

My favorite of these is called the butterfly. Let’s walk through an example.

GLD Daily Chart:

On this trending chart, I got long GLD as it pulled back to the mean at the 34 EMA, and I got out right at the high — using a low risk, high reward options strategy. With long calls, it would’ve been difficult to make money on this trade, but because I had a butterfly instead, and I had both long and short calls — I was able to maximize my gains on this position and make money even though this chart didn’t explode higher. 

Why Butterflies?

The idea with the butterfly is that you’re using a low risk, high reward strategy that’ll allow you to sit through volatility and even benefit from it. They’re typically also pretty cheap trades.

In this butterfly example, I got in for $1.34 per contract, and sold for $2.28 per contract in a couple days. It’s a very low risk method to trade. Plus, with a profit of about $1.00 per contract, when you’re only spending $1.34, is a bang for your buck!

Why Do They Work?

Butterflies are great in markets that hit and get stuck at support and resistance because the short strike in the butterfly continues making money. 

In a butterfly, you have one long strike, and two short strikes, with another long strike, you’re trying to capitalize on your first long strike, by getting it in the money — only up to the point where your short strike is. The short strike makes money by decaying overtime, and when you have two short and one long, if the short strikes stay out of the money then you can make money both on the long strike and the short strikes.

This is better than a long call. Why? Well on a long call if the market doesn’t go anywhere, you just have a long call that’s decaying into nothing.

Want to learn more about butterflies?

I taught this strategy from start to finish in my Stacked Profits course last July. In this course, we discussed using butterflies in a trend-following environment, for hedges, for reversion to the mean trades, and for earnings. Right now, I’m primarily using the hedging and reversion to the mean types. We trade these types of trades in my mastery program, or, you can learn how to do it yourself in the class! It’s all packaged and ready to stream right now!

Check out the full class here for all the details.

2 thoughts on “The power of the fly”

  1. I can highly recommend Danielle’s Stacked profits class, it was well presented and easy to understand, and being able to review is just awesome. Not to mention the Mastery program that is available. Following Danielle’s rules and set up I personally have only had one failure (lotto ticket) thus far so sitting at 90%, nice singles and doubles, Thank you Danielle for all your efforts. And the team at Simpler are just amazing!!!
    Thanks Guys!!!

    Reply

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