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Trading Butterflies

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Tom and Tony discuss everything you ever wanted to know about butterflies in just one segment. They explain how to setup butterflies and analyze a back-test to see if ATM Put Butterfly Spreads are better than Broken Wing Butterflies.

A butterfly is executed for a debit and carries positive theta and negative vega. By breaking the wing, we can raise the probability of success when implemented for a credit with no upside risk.

  • ATM Put Butterflies to Broken Wing Butterflies
  • S&P 500 from 2005 – Present
  • Wings placed at +/- 4% of price
  • Managed at 25% debit paid or held to expiration

The success and average P/L of the Broken Wing Butterfly(BWB) were significantly greater than the Put butterfly. Although the BWB has a higher Probability of Profit, the max profit is lower, and the max loss is more significant.

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