Butterfly Options Trading System

Abstract
A butterfly options trading system is made use of by the traders who are willing to take on high-risk investments. These traders usually trade aggressively and earn huge profits if the movement of the stocks is as per the defined path. Focus is also on the fact that if how close the strike price is to the middle strike price.
The write up below reflects certain features of the same. A butterfly options trading system may be referred to as an option trading strategy, which combines a bear spread as well as a bull spread. In this option trading strategy, three strike prices are made use of. There are two lower strike prices and one higher strike price.

The lower strike prices are mainly used for bull spread. The higher strike price is used for bear spread.

Understanding the butterfly options trading system:

In this trading strategy, the trader is making entry into three option orders simultaneously. Profits are earned as long as the stocks remains static or the stocks are moving in a direction, which was anticipated. However, no profits are earned in the event when stocks take a deviated path.
Profits mainly depend on the fact that how close the stock price reaches the strike price at the middle on the expiration date. If the price of the stock reaches the middle strike price or is very close to it, profits earned are large. The trader may make use of both calls as well as puts.
Essential features of the butterfly options trading system:

This type of option trading is best suited for traders who trade aggressively and those who intend to earn huge profits. These traders are also willing to under take great risks.
Traders indulging in these stocks focus on indexes as well as stocks, which offer high liquidity.
The Hold time on an average for these stocks options are 2 weeks to 6 weeks. Expiration date may also be another factor.

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Last Updated on : 23rd July 2013