Alert

Looking to access our full catalog of shows? Log in to see what's recent and get old favorites!

Big dawg butterfly

A Big Dawg Butterfly is a long butterfly spread with very wide spreads. The wider the long strikes are, the greater the max loss, but the higher potential reward in this defined risk spread.


Directional Assumption: Neutral

Setup: Butterfly Spreads can be constructed with either all Calls or all Puts. The trade is comprised of two short options and a long option above and below the short strike:
- Buy Call/Put option (above short strike)
- Sell 2 Calls/Puts
- Buy Call/Put option (below short strike)

Ideal Implied Volatility Environment : High

Max Profit: A Butterfly’s max profit potential is the distance between the short strike and long strike, less the debit paid. Max profit is realized if the stock price settles at the short strike of the trade at expiration.

How to Calculate Breakeven(s):
- Upside: Higher Long Option Strike - Debit Paid
- Downside: Lower Long Option Strike + Debit Paid

tastytrade approach:

You won’t see us routing these trades too often, as they are a lower probability trade. If we do though, we look to buy them when volatility is very high, which increases our entry cost. This reduces our max potential profit, but in turn, increases our probability of profit. Since BDB’s are still a lower probability trade, we like to finance them with other high probability strategies or turn this trade into a broken wing butterfly by widening the wing on one side.

tastytips:

When do we close Big Dawg Butterflies?
BDB’s are defined risk, so we don’t usually manage our losers. If the trade quickly goes against us and our assumption changes, we may close the trade prior to expiration to avoid max loss.

When do we manage Big Big Dawg Butterflies?
Our studies have shown that managing BDB’s at 25-50% max profit yields the best results. This allows us to not only increase our probability of profit, but also eliminate the risk of a winning trade turning into a loser.

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2021 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.