Thank you so much for all of your feedback on my last newsletter!
I received a bunch of emails and got a ton of great ideas. Overwhelmingly, the most requested topic was butterflies, with a little bit of earnings.
I had one question that I wanted to go ahead and respond to with a newsletter, with plans for more videos later on.
The question was:
Can you do a video (or video series, for that matter) on how to manage butterflies, or other options strategies (e.g. verticals) especially if/when they go against you? For example, say I place a 5-day expiring (call debit) butterfly because I think the market is going up. However, over the next day or so, the market instead tanks. How can I manage the trade to mitigate losses; or hopefully even better, is there a way to trade/manage it into a potential winner?
Want to learn more about butterflies? Click on the image above!
Here is my response:
In general, with a butterfly, the best defense is starting the trade so that it’s in the money. That way, when the market pulls back, it doesn’t lose as much value. If you start off the trade so that it’s at the money or out of the money, it’s a lot cheaper but it loses value very quickly if the market goes against you.
I do place at the money flies, when the market is in a strong trend. If I’m wrong and the market pulls back, and the setup is still working (i.e. there is consolidation but it hasn’t broken out, versus consolidation broke out the wrong direction), then sometimes I will add another butterfly at a lower level that can capitalize quicker when/if the market begins to go higher.
You can also add another fly with a different expiration date. Let’s say for example the market pulled back and now your butterfly probably won’t hit a target in time. You can set another one at a lower price target with a farther-out expiration date, and close the loser or wait to see if it will come back.
Closing vs. waiting depends on your initial risk when you got in. Sometimes, I will target a 50% stop if I’m wrong, but most often I am risking the full debit and not taking a stop. So, if it’s down, I simply wait and if it loses money then I already risked the debit and was comfortable with losing it.
I hope that helps, but I will definitely make some videos!
I hope this message finds you well! I wanted to take a moment to share some personal news with you. As many of you know, I’m expecting, and it’s almost time for me to welcome a new addition to my family! As a result, I’ll be stepping away from my weekly market updates to go … Read more
Hey traders! I’m spying a daily and weekly squeeze in Bitcoin, and it’s a stone’s throw away from breaking critical resistance at $70,000. If it can break through $70,000, we should go upward to $80,000. Coinbase (COIN) is also breaking out! Learn more in the video below:
Hey traders! Last week, I posted a bullish Netflix (NFLX) setup at Five Star Trader. At this point, this trade is making targets, and I’m taking profits. What does that look like? Well, Netflix has hit just below my price target of $730. My put credit spread, and my butterfly has two days remaining. One could … Read more
