Trading A Butterfly | Connie Hill, CMT | 12-2-19 | Trading With thinkorswim

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Trading A Butterfly | Connie Hill, CMT | 12-2-19 | Trading With thinkorswim

hello and welcome to our webcast today on trading with thinkorswim today we’re going to be doing another option strategy every single week we do a new one this week we’re going to be doing the butterfly now if your weather’s like my weather and it’s a little bit cold a little bit of snowy you’re not really thinking a lot about butterflies nonetheless that’s what we’re gonna talk about here today let’s go through some quick disclosures and we’ll get started options are not suitable for all investors is the special risks inherent option trading may expose investors to potentially wrap it in substantial losses in order to demonstrate functionality the platform we need to use actual symbols however TD Ameritrade doesn’t make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely a responsibility past performance of any security or strategy does not guarantee future results or success alright let’s jump over here to our thinkorswim platform hello Marvin and Ricardo and bill I appreciate you being here I appreciate your friendly greetings out here in our webcast land let’s come over here to thinkorswim and first of all we’re gonna take a quick look at a chart of Apple all right kind of here on our bigger screen now Apple you can see has been a bullish trend in stock we can see this 30 period moving average that’s what that red line is has been making higher highs and higher lows but recently is kind of stalled out a little bit you can see that maybe around this I don’t know let’s call it 267 266 range something in there it’s had a hard time getting above that and so for the time being is a short term in the short term is acting as a resistance level for the stock so what’s the expectation of movement maybe a little bit range-bound maybe a slightly bullish continuing the trends that it’s been having or I don’t want to give you that look at the chart before we go ahead and take a look at the option trading tab let’s come over here to the trade tab and we’re going to I want to show you the difference that choices we have available to us in terms of this series of option contracts in the chain we have some that will expire as soon as Friday of this week that would be in four days or next Friday that would be 11 days we have the monthlies that will expire in 18 days and they probably have quite a bit of volume with them you can see we could choose almost any of these out here generally speaking technicians and people trading this strategy may want to have not a huge timeframe involved they might choose something between 20 to maybe 3040 days sometimes because of how this strategy works they might want even a shorter timeframe and for that reason we’re going to go with the December monthly options you can see lots of open interest here on the call site lots of open interest here on the put side alright so generally that means that our spreads are going to be tighter and more narrow which when we’re doing any trade we want to see that now as you have questions here and I should have mentioned this at the beginning after I show you the trade we will have a 5 to 10 minute question answer period and so I’m glad you’re typing in your questions and we will get to them very quickly here now a butterfly trade you can do call butterflies or put butterflies today we’re gonna do put butterfly all right and it’ll consist of two different trades that we’ve already talked about in the past it’ll consists of a short put vertical which is a credit spread and a long put vertical which is a demo spread and it’ll marry those two together and as we do that it’s going to overlap a strike price giving us a quantity that is going to be a double that on the wings and typically all that but that space in the middle where there’s a – and short contracts typically we call that the body of the butterfly and then the wings are the two

strikes on either side of it now today Apple closed it to 64 16 we already noted that it has a little bit of a bullish intent on it right that trends a little bit making higher highs and higher lows so we’re gonna start out here with the strike price and sell it the strike price that we think the stock is likely to be closest to by the time the options expire in that final week where we have about 18 days left so in other words about three weeks a little bit less than three weeks okay because I’m a little bit bullish on this we’re going to take that approach for our trade here let’s go ahead and work with the 265 s actually take that bat let’s do the 262 50s all right and I’m gonna do this I’m gonna right-click my mouse anywhere on this line I’m not so much focused on a on a delta like many of our trades are I’m more focused on where as a trader you think the stock is likely to be around that last week of options expiration so that’s why we actually we really should do Stu $0.65 that will be higher than the price of the stock right now so I’m gonna do a right mouse-click I’m going to say bye and then I’m gonna find our little butterfly up here now don’t be worried if it’s not using the exact strikes that you think it might want to if you want to spread out the butterfly you can what it’s doing here for us now is just using the strike prices right near the body of that butterfly which is our short strike now I want you to notice here we have one straw one strike price of that is long that’s a quantity of one we have a quantity of 2 that’s negative meaning short and selling and then on the other side the other wing is going to be a quantity of one as well and that’s why I say you have the credit spread and the debit spread and they overlap each other with that middle strike price alright and it could it should be a fairly inexpensive trade now that could depend on the strikes that you choose if you want to spread it out more might not be as as inexpensive as you want now when I looked at this at the end of the day the end of the trading day it was trading around 23 cents all right right now it’s more than that because after the market closes people go ahead and they submit orders for the next day a certain limit orders and therefore the price of the bid in the ass change a little bit now thinkorswim will take the midpoint price for us which you can choose to use or you can move it closer to the natural price but more likely than not the the price of the options tomorrow morning after the market opens we know what the price of the stock is those spreads are going to shrink up alright for example on the 265 it’s 5:20 by 5:50 during the course of a regular trading day there’s really only a 5 to 10 cent spread on those options alright so you want to keep that in mind now I’m going to leave this here for a moment that’s basically how you do the trade and then the emphasis here in this particular webcast is showing you how to do those trades and then answering your questions either related to that trade or to the thinkorswim platform now I checked with Ken Rose who teaches the advanced option strategies class webcast throughout the week he taught one on November 21st so that wasn’t this last Thursday because we all had Thanksgiving the previous Thursday all right November 21st he taught and went into great detail about the butterfly strategy if it’s something you find intriguing now it might be a good webcast for you to go out and catch all right let’s see what kind of questions we have with this let’s see Sam was getting a little bit echoey sound on the video Sam I hope that that has cleared up for you that it doesn’t have an echo sound feel free to let me know on that Harry says is this about trading options I thought it was more general about thinkorswim and trading so Harry the idea here is each week we show you how to put in a different type of trade all right on the thinkorswim platform and we show you kind of the step by step to how to do that which I’ve done here but in the process you also learn about the thinkorswim platform in some degree or another does it mean we’re going to show

you everything about thinkorswim no we’ve done that in the past and we may resume that in the future but right now this is how this particular class is structured let’s let’s see what else we’ve got going on hopefully that helps Harry Bryce is saying the video has hung for him sorry about that Bryce I hope the video has come back Sam let’s see what sam says so now I’m gonna read part of what Sam said and we’re gonna get into a little bit of more description about this strategy Sam notes here we have one strike price on either side of the short lags right those are called the wings and then we have two strike prices right in the middle that’s going to be the 265 where we started that are going to be the short legs and if you want to hit max profitability it’s when the strike price is right around that 265 as close to it as you can get and generally speaking it’s going to be the last week of the option series life alright it usually is not going to hit your max target quickly usually we need some time to decay to allow that to help the trade profit now I’m going to to have us take a look at this on the analyze tab because this one I think is a really important visual we’re gonna say analyze trade I think I’ve got some stock in here that I need to get rid of let’s get rid of it looks like I’ve got a stock in there and I’ve got a vertical come back Mouse we’re gonna donate those all right and now we see on the risk profile this particular trade I’m gonna spread this out a bit I’m just gonna spread it out so hopefully we can see this a lot more visually than some little teeny scrunchie in the middle all right now the thing you’re gonna notice is this particular trade had a 45 cent debit I told you that earlier in the day in about the time the market closed it was about a 23 cent debit now one of the risks with this trade is that you could lose it all right it could be gone but right over here is the zero line and anything above the zero line means peak profitability that peak profitability you’re going to notice goes straight up from that 265 price I’m gonna try to draw that pretty straight here and it looks like it’s in the neighborhood of $200 all right so for the butterfly risking $45 or perhaps it turns into $23 it gets close to options expiration day and that’s where your peak profitability is now it doesn’t necessarily mean that you are gonna have peak profitability in fact if I come down here and I say reset rather says slices to break even on the expiration that’s going to be the 21st of December it’s going to tell us what’s the probability of making something on this trade the probability of making something on this trade goes up here to this value 20 point 53 percent okay is that a huge percent no it’s not in fact it’s one of those types of trades that it has a very very much a lower probability of success but if you’re right on the trade you get rewarded in a big way now many people might not try to get the exact max profit out of the trade because that can be very difficult but what if you shop for a range I’m gonna say maybe here and over where you have 50 dollars of profitability for in this case the 43 cents that you put in your it’s similar to a one to one ratio risking 43 cents or 43 dollars to make 50 dollars on the trade alright remember this is just doing one series of contracts we’re not doubling up on those contracts at all but might not be as likely to fall in that premium spot in fact there’s a 35% chance you’re going to go to the bottom side of the break-even there’s a 44 percent chance that you’re going to be less than zero on the I said negative I meant positive this site is going to be negative that it’s two sixty two point ninety four or lower come options expiration day now those of you that are familiar with the risk profile know also this purple line here which is really hard to see it

almost is following that zero line right now here’s your profit and loss right now or as of this date today is the second of December believe it or not alright and so we can change that date if we want to to change some assumptions and so when you’re playing what if and what if the price does this by this date and so forth that you could get a better idea of a possibility a possible outcome for your trade now okay Brice’s let me know the video has come back great Bryce I’m glad that’s the case I’m hoping that there isn’t a lag on it for Sam either hope that is all cleared up now let me ask what other questions you might have and if you don’t have any questions I’m gonna pose a couple questions to you that I had when I first learned about this butterfly strategy knocked off voted out right now and give you a chance to type in any other questions you have why would somebody do a butterfly strategy that might be probably one of the most important questions is why would somebody want to do it if it’s such a low probability of making money in this case and are just a little over twenty percent what’s the point all right the point is this if you think you have a good feel for where you think the stock is going to go by a certain time it can be a very big payoff and looking at the graph is going to help you determine if you think you can determine where the price of the stock is actually going to go we closed at 260 416 the strike price we chose was 265 somebody may have chosen 270 if they were being maybe a little bit more bullish on it and we could have done that as well or if they think the stock is running out of steam and likely to pull back a bit you know they might have selected something like the 260 strike price or the 250 750 strike price alright just depending on how bullish or bearish somebody might have been and knowing in this case it’s a very short timeframe all right one more question that I had when I learned this strategy and actually more of an explanation and a question was the question is you know how do you make money on the trade making money on the traders when within a few days were within that week when the option expires in time decay is really rapid and therefore these two legs that are short start locking in some gains for you we’re not seeing this whole thing let me let me let me reduce the price slices here there we go got my mouse to cooperate alright that’s that trade down there that green one alright knowing that there’s possibility that it could be in that range is probably the biggest reason people pursue it however a big consideration is is you have to be a little bit patient if with it we have 18 days before it expires and more likely than not we’re gonna have to let the stock bounce it around and bounce around hopefully in a fairly neutral zone in order to get that profit out of the trait and you might even go so far as to say okay the stock needs to be between 260 to 90 for which it was close to that when it closed today or and at 260 705 right because those are going to be our two breakeven ranges and so even if you made two times or three times maybe not even up to $200 that would be more than four times then maybe you have your sights a little bit lower to take profit when it’s hitting that sweet spot when you have positive profitability this might be one of those trades where we say don’t get greedy just follow the rules of the trade don’t think you’re gonna catch that huge shoes match profit every time when you’re doing a butterfly it’s probably not the best approach that’s gonna be pretty tough to do Adele has a quick question here and now I have to apologize to you to show you what happens if we widen out the wings let me do it real quick but my time is up so we won’t spend a lot of time on it what if we came down here and just said 270 on the top and let’s say we went down to 260 on the bottom I’m going to unlock my lock you can see the net debit is greater and the profitability goes up a little well it goes up quite a bit it’s a little bit shy of 400 it’s in the neighborhood just a little bit below

that so maybe 390 or something like that you have to look at it for sure so it widens your risk it does almost double your profit potential but notice how much your price goes up it goes up from 45 cents to 108 so it more than doubles the price of that delbet but you can play around with it and you can see where you feel comfortable as far as the strike prices that you choose to use that’s a great question they’ll appreciate you asking that all right like I said my time is up here for today next week we are going to be talking about a back spread ratio trade all right might be new to some of you we’re going to discuss it and explore it and show you some examples and how it works appreciate you being here today coming up right next number be at the top of the hour is going to be a class called trading with a smaller account usually Barbour Armstrong does that John McNichol is gonna fill in for her today so stick around it’s gonna be a good class we’ll see you then bye-bye