http://www.traderinterviews.com/idealab/idea/view/short-puts-vs-bullish-butterfly The latest comments on Short Puts vs. Bullish Butterfly Wed, 15 Apr 2009 03:43:26 -0700 en-us Copyright TNC New Media Inc., 2006 - 2012 http://www.traderinterviews.com/images/traderinterviews_144x19.gif http://www.traderinterviews.com/idealab 144 16 http://www.traderinterviews.com/idealab/entry/view/short-puts-vs-bullish-butterfly#c122
Actually, there are some things you can do. Stock have bounced so strongly lately, that you'd think be bear market is over. WIth so many bullish trades, it is even hard to be selective. I pick stocks that jump >10% in one day (there have been quite a few as of late). Then I set the butterfly with just above the current stock price.

Normally, a butterfly would be 3 strikes wide (for example, 30-35-40). Well, I make my butterflies wider, with 5 strike prices (such as 35-45-35). This has worked well for me lately.

I do not risk more than 1-2% of my capital, but my reward could be 4-8% of my capital, so a few of these and my potential gain could be high. I close the butterflies 10-4 days before expiration, since a strong move in either direction too close to expiration and my profit could be lost.

I also like to use the broken wing butterfly with a wider space between the lower wing and the body. Take for example this butterfly on DNDN a stock with the highest implied volatility I have ever seen:

BTO 10 May 17.5 call at 3.4
STO 20 May 22.5 call at 1.87
BTO 10 May 25 call at 1.38.

I think that if this stock is go to higher, it will probably do it rather quickly. With this broken wing butterfly, profits are assured on any rally, be it slow or fast. We'll see...

If I am wrong, however, We can lose all our capital, so it is important to keep the risk low.]]> http://www.traderinterviews.com/idealab/entry/view/short-puts-vs-bullish-butterfly#c122 Wed, 15 Apr 2009 03:43:26 -0700