premium: buying butterfly spreads - amazon s3 · premium: buying butterfly spreads in part 3 of our...

Premium: Buying Butterfly Spreads In Part 3 of our "Premium" series,* we test

butterfly spreads to see how this low probability / high profit-potential strategy performs over many occurrences.

1 of 9 * Market Measure, “Premium: Why Selling it Works”, Oct 23, 2014 * Market Measure, “Premium: Selling Straddles”, Oct 28, 2014

NOTE: For new tastytraders... !   A traditional butterfly is a neutral strategy;

the belief is that the stock will stay within a range by expiration

!   Sell 2 at-the-money, and buy 1 in-the-money and 1 out-of-the-money (all calls or puts)

!   We never sell butterflies, we buy them

!   The higher the volatility, the “cheaper” the butterfly

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Premium: Buying Butterfly Spreads

!   SPY: Bought a butterfly every 5 days for the past 5 years

!   Used expiring month closest to 45 days until expiration

!   We tested various “wing” sizes based on a percentage of the underlying price (see next slide for an explanation)

Study 1

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In the following butterfly (from dough.com) Each wing is $5 wide (i.e. roughly 2.5% of underlying price on each side of the spread)

This first study, we vary the size of the wings.

Study 1

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Results* 5% wide (each wing)

10% wide (each wing)


% of winners 42% 53% 59%

Average trade P&L $0.40 $43 $58

Average winner $216 $290 $312

Average loser -$162 -$238 -$289

Max win / loss $491 / -$504 $749 / -$795 $896 / -$1474

Total P&L $96 $10,651 $14,377

* buying every 5 days for past 5 years (260 total occurrences) 5 of 9


Study 2

!   Next, we examine how implied volatility rank (IVR) affects the profitability of the strategy

!   We also examine 5 years of daily butterfly spreads using the same stock (SPY)

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Results* Below 50 IVR (at expiration)

Above 50 IVR (at expiration)


% of winners 53% 67%

Avg. trade P&L $20 $152

Max win / loss $1378 / -$832 $752 / -$733


% of winners 57% 77%

Avg. trade P&L $27 $284

Max win / loss $1982 / -$1498 $896 / -$693

* Buying every day for past 5 years (1100+ total occurrences) 7 of 9


Take aways !   Wider spreads have

greater probability of profit; they also carry greater amounts of risk. The cost paid for the spread is minimized with greater implied volatility.

Average amount paid

Wing Span Below 50 IVR

Above 50 IVR

5% wide (each wing)

$235 $221


$724 $523


$1268 $977

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Take aways (continued…) !   Butterfly spreads are a high implied

volatility strategy – the spread is best taken when the cost of the spread is minimized compared to the probability of profit

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Premium: Buying Butterfly Spreads DISCLAIMER: The purpose of this material is to demonstrate market trading techniques and strategies designed to give you the skills

and confidence to manage your own investments. The risk of loss in trading securities, options, futures and forex can be substantial. You must consider all relevant risk factors, including your own personal financial situation, before trading. Options involve risk and are not suitable for all investors. You are assuming the entire risk of any and all trades placed in the stock market. Due to the time- critical nature of trading, the varying fees charged by brokerages, and the activity of other market participants, tastytrade cannot guarantee that similar trades you place will mirror the exact performance of the tastytrade portfolio. tastytrade is not a licensed financial advisor, registered investment advisor, registered broker-dealer or FINRA|SIPC|NFA-member firm. tastytrade does not provide investment or financial advice or make investment recommendations. tastytrade is not in the business of transacting trades, nor does tastytrade agree to direct your commodity accounts or give trading advice tailored to your particular situation. Nothing contained in tastytrade’s portfolio demonstration constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction or investment. BY USING THE TASTYTRADE WEB SITE AND ACCESSING THE TASTYTRADE MATERIALS, YOU AGREE, AT ALL TIMES, TO INDEMNIFY, DEFEND, AND HOLD TASTYTRADE (INCLUDING ANY OF ITS AFFILIATES, OR ITS RESPECTIVE SUCCESSORS AND ASSIGNS, OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LICENSORS, OPERATIONAL SERVICE PROVIDERS, ADVERTISERS, OR SUPPLIERS) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DEMANDS, SUITS, LOSSES AND COSTS (INCLUDING ATTORNEYS’ FEES) RESULTING FROM TRADES YOU PLACE IN THE MARKET. TASTYTRADE SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE, OF ANY KIND, DIRECT OR INDIRECT, IN CONNECTION WITH OR ARISING FROM USE OF EDUCATIONAL SERVICES PROVIDED AS PART OF THIS PORTFOLIO DEMONSTRATION.

premium: buying butterfly spreads - amazon s3 · premium: buying butterfly spreads in part 3 of our...

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