Options Trading Strategies: Great Risk Reward with Butterflies
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Options Trading Strategies: Great Risk Reward with Butterflies

Henry Gambell 12/12/2013

Hey guys. This is Henry Gamble and I'm going to be doing the free video tonight, stepping in for John. I wanted to focus in on a couple of things -- basically just an options trading strategy that revolves around usually options that are going to be expiring in the next couple of days. But this is a way that you can take a look for butterfly set ups that are advantageous.

So of course, today is Wednesday, tomorrow when you can actually take action on this stuff it's going to be Thursday morning. From Wednesday into Friday is when you're really going to see the most decay in out of the money options especially the weeklys. Or of course, if you're approaching the monthly contract it's the same idea. So my take on SINA, seeing it was, I know, I've got a voodoo line here at 79.46. We've been consolidating around that price zone pretty much.

So I'm looking for something that has a decent implied volatility, you've got support and resistance. It's near a key strike price, if at all possible and then you can start setting up those trades. So a couple of things I'm just scanning for here and we'll talk about SINA in just a moment -- but I've got basically just scanning through the weekly list of options. But I want to have something that will at least trade weekly contracts. I'm looking for an IV (implied volatility) percentile that's at least above the lower third and that I've put 300 in here just so there's really no upside cap.

I'm going to add one more fundamental filter here where the last price is at least $30.00. So I'm not going to spend much more time -- you know, I'm not going to spend much time trading stuff below that, and that just kind of helps you filter your results.

So we're waiting for a second here to see what we get, and we've got a pretty healthy list. So I start scanning through these and what I'm looking for is something that is trading close to a given strike price.

First Up is Facebook

Let's take Facebook for example. I can see the last price traded was 49.38. And if we come back over and look at a chart, Facebook has a voodoo line that is right here at 49.65, so that's pretty close. Then we come back over and start taking a look at an options chart. Now these, like I said, you're going to focus on the contracts that are just about to expire. And knowing that we're basically trying to trade up into that 49.65 area, closer to around 50, well then that gives you an opportunity to come in and set up a butterfly around that. Now Facebook you've got a 50 cent wide strike so you can really specify this stuff exactly. What I would like to look at here is doing something like a deep and wide one-month 4 strike butterfly. And then what this is allowing you to do -- of course it's better if you can buy these a little bit cheaper. I like to try and get them -- if you can get them for a quarter of what the max profit will be -- those are typically awesome trades. If you have to take it at half that's a little more -- that's a little trickier to try and get a fill on.

But what you're looking at right here is if you can buy the Facebook butterfly 80 cents and then this rallies up in to this level, well then you can look for the $50.00 calls to expire worthless. The 48s that you bought, obviously you're going to make about $2.00 on those in a perfect world. But the main primary thing here is that's a cheap way to participate in the sale of premium and you really see that expand over the Wednesday and in to Thursday and then ultimately Friday for those moves. So Facebook may be up in to 50, kind of makes some sense. We'll take a look at that.

What About Dupont?

Let's see if there's another one that stands out here. So we're flipping through here. You really don't want to try to do this on an index or anything like that. Let's take a look at Dupont. So that's trading there at $60.00. So we flip over this and bring up a chain. That one really doesn't stand out to me as much because you're not really against a key area of support and or resistance there.

LuLu Does Well Around Earnings Time

And one last one we'll take a look at -- now this is not so much based off expiration but this is based more off an earnings play. I just looked at LuLu. It had a mild up side bias, more based off the fact that they kind of have a history doing OK around earnings. Of course at any time they can have the disastrous report that kills this. So you've gotta know your risk going into it. But I look at this and say, 70.41 is the key area of resistance. You've got $70.00 strike options here so doing something where you are selling the 70 strike, buying the 68 and then selling the 72, is a good way to participate in these earnings trades for you know, a very small debit. Then if you get to pop into these levels the idea is that the premium of the 70s kind of gets sucked away.

Obviously time decay is working against those from Wednesday into Thursday. And the idea is being able to take a quarter and turn it into 50 cents or something to that effect. And of course if you buy it for 25 cents -- let's just take a look at the actual position here. So the position we've got was buying the 68s, selling the 70s and buying the 72s. If we get into that for a quarter and your max profit on this is going to be $2.00. It's very rare that you're actually going to see that full max profit be realized. So I would focus more -- you can come over here and arrange positions by order. To do that it's easier to look at and say, OK. I got it for 25 cents, if this pops up around 50 or 60 tomorrow; it's a good overnight trade. It's a way to take advantage of the things that we've discussed and hopefully if you're new to butterflies that will help. So see you guys at the next free video.