Countdown Test

00days 00hours 00minutes 00seconds 2020-12-25 12:00 AM     00days 00hours 00minutes 00seconds 2020-10-25 12:00…

It’s been a wild two weeks in the market thus far—dominated by headlines of geopolitical tensions.

But despite the whipsaw action the market has experienced—I stay true to the core—and rarely let the news drive my trading decisions.

And for some to hear that… It’s shocking.

I don’t need a Bloomberg terminal, a squawk box, or half a dozen monitors to execute my strategy.

And neither should you!

You see, the tools I apply to tell me what to trade are far superior than any screaming mad man on the tv.

These tools I developed will tell you a far truer story than the fake news they are spitting out…

As a professional business owner and investor, I can tell you less is more.

I can narrow in on the stocks I want to trade and place all my orders all while spending only 15 minutes PER WEEK.

How do I do this?

By putting the odds in my favor each and every day.

For example, today, I’m going to teach you about a strategy that when executed properly—will give you some of the best risk to reward setups out there.

Want to learn a little known but powerful credit spread that takes advantage of markets that move either up or down?

 

 

The Short Butterfly

This strategy profits if the underlying stock is outside the wings of the butterfly at expiration.

What is it made up of?

This strategy can be comprised of calls, puts, or as an iron butterfly, using both calls and puts.

For this article, let’s focus on the Short Call Butterfly.

The Short Call Butterfly is a credit spread that consists of two long calls at the middle strike with one short call at each of the lower and upper strikes.

The upper and lower strings (or wings) must be equal distance from the middle strike price (the body), with all of the options having the same expiration date.

Here is a sample payoff diagram for the Short Butterfly.

 

 

As you can notice, at points A and C you will receive a max profit and at points B you will see the max loss on this trade.

Characteristics of a Short Butterfly

A short butterfly is a net credit trading strategy. Meaning that a trader will be paid up front to take this risk.

This is a great addition to a credit put spread or credit call spread strategy since it removes the requirement to pick a direction in which the underlying stock is going to move in.

Make sure to learn more about how I have gone 6 months and counting without a loss and stack the house odds in my favor.

 


Profits

Maximum profits for a Short Butterfly is obtained when the underlying stock price rally past the higher strike or drops below the lower strike price by expiration.

If the stock ends up at, or below, the lower breakeven price, the options will expire worthless and the trader will keep the initial credit when entering the position.

Alternatively, if the stock ends up at, or above, the upper breakeven price, the options will expire worthless and the trader will keep the initial credit when entering the position.

However, if the stock at expiration falls between the two breakeven prices the trader will suffer the max loss on the position.


Limited Risk

The formulas for calculating the maximum loss are:

Max Loss = Strike price of long call – strike price of lower strike short call – net premium received.

The max loss occurs when the price of underlying equals strike price of the long call.


Breakeven Points

There are 2 break even points for the short butterfly position. These breakeven points can be calculated by the following:

Upper breakeven = strike price of higher strike short call – Net premium received

Lower breakeven = strike price of lowest strike short call + Net premium received


Volatility

An increase in implied volatility, with all else equal, will have a neutral to slightly positive impact on this strategy.

 


Time Decay

Days until expiration decreasing, with all else equal, will have a positive and negative impact on this strategy.  


Positive Impact:

If the strike price is aligned past either breakeven threshold, time decay will be forcing the trade to realize its gains.  

Negative Impact:

If the strike price is inside the body of the butterfly, time decay will be forcing the trade to realize its losses.


Assignment risk:

The short calls that form the wings of the butterfly are subject to exercise at any time, while the investor decides if and when to exercise the body.

The components of this position form an integral unit, and any early exercise could be extremely disruptive to the strategy.

There are many factors to consider when short options that may negatively impact the strategy.

It is best to remain aware of the situation when a stock is being restructured or there is a capitalization event.

Such events are mergers and acquisitions, spin offs, or special dividends as this could significantly move the underlying stock price and cause early assignment. 


Expiration/Pin risk:

This strategy at expiration will continue to carry risk.

If at expiration the stock is trading right at either wing, the investor will be facing uncertainty as to whether or not they will be assigned on that wing.

If the stock is near the upper wing, the investor will be exercising their calls from the body and is fairly certain of being assigned on the lower wing, so the risk is that they are not assigned on the upper wing.

Likewise, if the stock is near the lower wing the investor risks being assigned at the lower wing.

The real problem with assignment uncertainty is the risk that the investors position when the market opens after expiration weekend is other than expected, subjecting the investor to events over the weekend.

Although the risk might be small, it is still present as you could be long/short stock through major events without realizing this.


Conclusion

As with everything, this strategy comes with some major trade offs. And that’s ok!

The short butterfly is a fantastic position to trade if you believe there is going to be a market move and you are uncertain about the direction.

Another added benefit is this is a credit spread, therefore able to be utilized in a positive cash-flow trading system!

Pros of a Short Butterfly

  • The risk is capped.
  • Credit spread so you receive capital up front.
  • Bi-directional profit opportunity
  • Less risk than long straddle
  • Narrower breakeven compared to a Long Butterfly


Cons of a Short Butterfly

  • The returns are capped
  • Unlike short calls, if the stock does not move you will have max loss
  • Potential for large commission rates with 4 legs being traded.

 

Click here to sign up to Options Profit Planner today and start putting trades like this to work for you as early as tomorrow!

Author: Dave Lukas

Do you know that some of the biggest winning trades I have ever seen came from people who bought options?

No joke – I’m talking about stocks that rocket after news… causing the options to just explode!

Heck, the other day someone bought 1,000 call options in Beyond Meat (BYND), forking over around $90K in options premium that could have turned into $1.7M in just a few short days.

But when the music stops… boy does it stop.

Gambling is fun and people make a lot of money … until they hit that wall and lose it all and more.

I know people who have turned $20K into $50k from buying options… but I’ve also seen the same traders give it all back.

Some wiping out their accounts, and even their most prized assets—their home.

How did this happen?

They start making bigger and bigger bets without considering the risk.

That is, until one day it all catches up to him.

This is the kind of story that scares people from trading options, and why so many never take advantage of their income-generating strategies!

You see, when someone buys an option there are a lot of things that have to be perfect for the trader to make money.

The stars must align just right for profits to be seen.

First, they have odds against them from the second the trade is put on.  There is about a 33% chance that options buyers will ever make money.

This is worse than flipping a coin!

And the main reason why I play this game differently.

You are better off going to play blackjack than buying options since you’d have better odds of winning.

 

The other thing options buyers have working against them is TIME

 

Now, when you buy an option there is a term, time decay, also known as Theta working against you.

And the closer you get to the expiration of the contract, it loses value even faster… until it’s worthless!

That’s why you can even be RIGHT with your option and still lose money!

Did you know that more than 75% of all options contracts in the markets expire worthless?

With so many obstacles to overcome buying options why are traders willing to gamble looking for thrills in the options markets?

After all, isn’t trading supposed to be a long-term career and a business source of reliable income and growth?

Well, it can be!  That is, as long as you take the opposite side of the trade!

That’s right – you want to be the options seller!  

Think about this as being the insurance company or the casino.  They might lose once or twice but they rake in the cash with steady positive cash flows every single day!

The Casino:  

Every day thousands of people give you money (buy options) in hopes that they win big on their bets.  That’s ok, sometimes they do.  

But the odds are in your favor.  The amount of people giving you money far exceeds the number of people winning.

The Insurance Company:

Just like the casino, the insurance company takes money from thousands of people every year who pay for insurance to protect against a future event.  

For example, every month people working pay an insurance company a premium for their health care as protection against an expensive surgery they may need.  

But the insurance company knows that the majority of the health care buyers NEVER use the insurance for major healthcare bills.

This allows the insurance company to keep the collected premium as an income stream from their millions of payers!

As both a casino and an insurance company – the odds are always in your favor!

Both of these examples are how options sellers have the advantage over option buyers!

In fact – when we sell options we have both time and the house odds in our favor!

House odds:  As an option seller, you have well over 50% chance of winning on your trade.  Closer to 75% to 90%, to be exact.

Time:  When somebody buys options, time decay or Theta immediately starts to destroy the value of the option contract.  And if you are the option seller, time decay works in your favor!

Remember:  If 80% or more of the options expire worthless, that means 80% of the people selling options are making money!

Here’s how you can put time and the house odds to work for your portfolio.

So why isn’t everybody selling options if it’s so great?

In short…

It’s easily the most boring strategy you could come up with.  The thrill of making 100% or 200% or more in a matter of minutes or days just is not there.

The adrenaline rush is missing.  The feeling of winning is gone.

And the feeling of winning is what keeps the gamblers going back to the casinos for more.

But that’s ok.

As a business owner, I know the importance of cash flows and steady income streams…. And selling options is no different.

I have multiple sources of revenue and this is just one more to add to my portfolio, making a consistent 30% to 50% and even 90% gains.

Don’t believe me just yet?

 

In October 2019, we locked in 4 solid winning trades for consistent returns.

Now, I don’t know about you, but knowing that I can create a revenue stream that wins month over month, year over year, is far more appealing than gambling and losing my house in the off chance to turn $25k into $1,000,000!

In fact, I go into even more details about the Options Profit Planning system I have created and the advantages of selling options in this video.

Click here to learn more about the Options Profit Planner.

Author: Dave Lukas

Last night Dow futures were down by 400 points after it was reported that rockets were fired at an Iraqi air base housing American troops.

However, by the time most of us woke up this morning, the futures were nearly flat.

I think we can agree that choppy markets are a common occurrence in the markets.

In fact, these flat patterns occur everywhere, in any stock, on any timeframe.

Choppy market conditions are among the most difficult to trade.

For example, if you attempt to buy the breakouts, the stock just falls and rolls over. If you try to short into the news—you are just one tweet or headline away from watching that position get ruined.

There are traps EVERYWHERE.

At this point I bet you are wondering…

What is a trader supposed to do during these sloppy conditions?

Is there a magic formula for trading choppy markets?

Which indicators work best for increasing your chances of winning?

Well… you are in luck.

Because today I’m going to cover how to trade the chop—so you can be profitable in even the muddiest waters. 

 

Learn to identify a sideways market


The first step might seem straightforward and obvious but is often ignored by traders.

A sideways market is one where price action will not trend in one direction or another and is fluctuating inside a tight price range.

This up and down price action through the tight price range reflects major indecision in the markets with the bears and bulls unable to take control of the stock.

What is consolidation?

Consolidation is a sideways pattern in the market that is extremely difficult to spot as the pattern is forming.

Once the pattern is formed and a breakout occurs, a consolidation is easy to spot but then it is too late to trade.

So what is a trader to do?

This takes practice, and many losses, before you can get the hang of how to trade a consolidation pattern as it is occuring.

Usually after a loss on a breakout trade does the trader then believe the markets are consolidating and not breaking out.

One characteristic of sideways markets is periods of short and sharp price movements, but upwards and downwards caused by bulls and bears attempting to control the stock.

Contrary to a trending market, a sideways market will often be comprised of brief periods of strong price action in one direction that will reverse shortly after, usually off short term support and resistance levels.  

 

 

This is an example in the SPY’s of a sideways market with sharp price action in both directions.

As you can tell, there are sharp price action pushing through both the support and resistance levels as traders are trying to fight for the new trend breakout.

 

Define the range

Once you have identified that the markets are in or have entered a consolidation phase, one of the first things you want to do is to begin marking the consolidation ranges.

Usually the phases are well defined and formed by a flag or channel forming from other recent patterns.  

 

 

 

 

As you can see, the consolidation or channeling markets in the bull flag (outlined in red) is the range that is in question.

In the case of the consolidation channel on the SPY’s, the range is tight at approximately 1.5% from top to bottom of the channel.  

 

 

Sometimes a consolidation phase will be too tight to make it not worth trading at all.  Other times the range can be wide enough to allow you to trade with caution and tight stops.

The wider the range, the more space you technically have to take and manage your trade in, but also the more risk you inherently take with your stop levels.

By defining ranges, it gives you a more clear perspective of the broader market trends.  WHen you know the upper and lower limits of the trading range this allows you to watch the range itself and even position your trades for a breakout movement.

This is extremely useful when the top and bottom levels of the consolidation phase are defined by trend lines that form a well defined consolidation or wedge pattern that is slowly constricting.

Trading this pattern will guarantee an inevitable breakout and is the highest probability trade a trader can take.

 

Prepare for spikes

Even though you may think you are trading a consolidation where prices should be restricted and contained, many times prices will spike through support and resistance levels.

Pro tip: Don’t let the spikes fool you as a new trend.  It’s usually a trap and prices revert back into the channel.

This uncertainty calls for a conservative trading style.  This pattern requires placing tight hardstops instead of mental stops on all your trades and using trailing stops and looking for target prices to lock in profits at.

Why?

Because when you’re in a consolidating market, price can reverse suddenly and wipe out all your profits before you know what happened.

This is one of the primary reasons many traders struggle to effectively trade in sideways markets.  The inability to use quick exits, and different stop types lead to traders giving back profits or being caught in the wrong direction on the trade.

This is especially true for trend traders who are not used to the choppy markets as they are typically able to ride long and smooth trades.

 

 

In this example, you can easily see how quickly the stock price reversed when it went outside the channel support levels.

This is why a trader wants to make sure they have quick exit logic for trading consolidation and sideways markets.

 

Balance aggressive and conservative trading

While its extremely important to not be overly aggressive when trading a sideways market, it’s equally as important to not be ultra conservative either.

In fact, when trading a strong trending market it might actually be better to be conservative in your approach.

One major difference between trend traders and chop traders is the use of target exits.  As a trend trader, you let the market take you out of your trades instead of removing yourself from the trade.  This is done by using trailing stops instead of targets for your exits.

In a sideways market since the market sentiment is weak, managing the trade too tight can result in a smothered trade as your prices whipsaw around on your quickly.

This also means that when you are trading a range bound market it is best to take profits quickly and use targets to take advantage of the quick price action.  


In a sideways market using trailing stops is not recommended as you will not have enough profits to “trail” effectively and quickly.

Additionally, being extra conservative is also not recommended either when you trade a sideways market.

For instance, if you are a trader that likes to move a stop to breakeven as soon as the trade moves sideways or profits go in your favor, you will be very disappointed.

Why is this a bad thing?

Well because you will end up with a lot of small no-loss-no-gain results for a lot of your trades.

This strategy is a great safeguard in trending markets but is a terrible strategy for sideways markets.

So therefore, being ultra conservative in a sideways market is also not recommended for profitable trading.

 

Wrapping it up

It is easy to see how trades set up in sideways markets after the patterns are identified and are extremely difficult to trade them as they are being formed.

For the traders who wish to sharpen their skills in sideways market trading, it is crucial to find the balance between aggression and conservation when it comes to trade management,

Unfortunately, it may not be a straightforward solution and varies widely among different stocks and markets, the strategy the trader deploys, and the risk tolerance they have for sudden change in trade direction.

However, trading sideways markets can be an extremely lucrative trading style if executed properly.  By knowing the range of the trade pattern, keeping a close eye on false breakouts, and using targets instead of trailing exits, a trader can use this strategy for quick and substantial profits.

Are you looking for a system that can generate profits daily selling options?

How about having a 6 month of steady returns and no losses?

 

Join today for Options Profit Planner and put selling options to work for you today!

Author: Dave Lukas