Time Bomb Butterfly- Very Forgiving Speculative Strategy

How many people have attempted to call the top in the market over the last 2-3 months? Maybe you bought a put or put vertical spread and got beat up pretty good as the market continued up? My trade idea for today gives a cheap approach to playing directional opinions in high priced stocks. Why did I come up with the name Time Bomb Butterfly? I can plant these strategies cheaply on the up or down side in a multitude of stocks or Indexes. The risk reward is awesome and when they move in our direction, they can explode into 100% or more returns.

Trade Opinion: With SPX near all time highs at the 1700 level, I would like to utilize a strategy that can really do well if we back off, but is very forgiving if it goes against me. But because the market has been relentless to the upside and none of us knew if a little decline will come from these levels, my investment has to be reasonable.

Trade Strategy With SPX at $1686  I will place an out-of-the money Put Butterfly.

Buy 1 August 1680 Put
Sell 2 August 1670 Puts
Buy 1 August 1660 Put. Total Debit $65.

Risk:  $65 and that’s also the margin requirement

Potential Gain:  at expiration with SPX at 1670 the 1680 put is $10 ($1,000) in-the-money, so $935 is the potential gain (less commissions).

Trade Plan: This is a 21 day trade. I am looking for minimum 50% profit on trade ( Would need to sell spread out for around $130 or $140 credit). I would hold this about 14 days at most. The forgiving part of this trade is that if we are outside the graph area in 14 days , we look pretty good. The spread holds some value. Over 14 days , the spread has a nice range between 1640 and 1690 where we can make between 50 and 125%. The higher returns will be near the short strike of the butterfly.

Graph : The graph below illustrates the graph of the Time Bomb Butterfly. The solid green line is the graph at expiration, in 21 days. The lighter green graph is the graph in 14 days. Looking at the lighter green graph in 14 days, you can see the forgiving nature of this strategy. Even well beyond the outside of the graph, the P and L stays positive for a good bit. You can also notice the wonderful yield opportunities this strategy presents by looking at the yields, which can be seen on the left side of the graph.

ds tb butterfly

 

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Dan Sheridan

sheridanmentoring.com

Dan Sheridan is a 22-year CBOE veteran who worked with the highly successful specialist firm Mercury trading, which was headed up by Jon and Pete Najarian. While at Mercury Trading, Dan was responsible for training most of the traders including Pete Najarian, one of the current hosts of CNBC's Fast Money. Dan has been teaching…

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