RED Option Butterfly/Skewed Butterfly:

Although the butterfly strategy has been around for some time, we now combine traditional trading with innovative spreading. This advisory will recommend index butterfly positions for small debits that have high risk/reward ratios. We will combine those with high probability skewed butterfly positions for small credits.

A traditional butterfly is a three-legged option spread. It is the simultaneous sale of two at-the-money near-month calls or puts and the purchase of one call or put at the next higher and lower strike, in the same expiration, in the same underlying. The skewed butterfly is also a three-legged spread but the strikes are widened in order to embed a short vertical spread inside the butterfly. This is done in order to reduce the cost and create a net credit. This trade has more risk but a higher probability of success and greater potential maximum profits. Butterfly spreads profit when the underlying moves toward the short strike or remains in a reasonable trading range until expiration.

All butterfly recommendations in this advisory will be defined-risk spreads. Some spreads will be debits spreads and others, particularly the skewed butterflies, will be done for small credits. We will recommend at least two butterfly spreads every expiration cycle based on underlying price, volatility, liquidity and trade price. This advisory offers one the best learning experiences for complex spread trading.

Our Chief Strategist finds trades where the price of the butterfly indicates a wide profit zone and a relatively high probability of success. We will recommend at least two equity butterfly spreads every expiration cycle based on underlying price, volatility, liquidity and trade price.

We created this advisory to offer RED Option clients the ability to achieve an approximately 1:1 risk/reward ratio. Auto-trade clients are likely to receive a better execution price because of large order, negotiated prices for multi-legged spreads like butterflies.

Examples of Butterflies:
Example 1: (Balanced Butterfly)