Transcript SMB CAPITAL OPTIONS TRADING PROGRAM

SMB CAPITAL
Broken Wing Butterfly
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Broken Wing Butterfly
Video One:
Overview
Overview
• Must-have strategy for every option trader
• Can work in any market; up, down, stagnant, volatile
• Broken wing butterfly is variation on popular
professional trader strategy
• Theta trade; make money over short time frames
• Make money if wrong on stock move; make MORE
money if right on the stock move
• General entry guidelines
The Professional
Trader’s Trade
The Professional’s Trade
+$
-$
1. Buy one call for $6.00
The Professional’s Trade
+$
-$
1. Buy one call for $6.00
2. Sell higher strike call for $3.00
The Professional’s Trade
+$
-$
1. Buy one call for $6.00
2. Sell higher strike call for $3.00
3. Sell a total of two calls
1x2 Trade
Ratio
The Professional’s Trade
+$
-$
100
110
120
Cost: Even money
Buy 100 call for $6.00
Sell 110 call twice at $3.00 each
Risk:
Unlimited, but only with stock higher
None if stock goes lower
Reward:
$1,000
The Professional’s Trade
+$
-$
100
110
120
Risk:
Unlimited, but only with stock higher
None if stock goes lower
Naked short one 110 call
Not allowed to trade, or
Huge margin requirement
The Retail
Trader’s Trade
The Retail Trade
+$
-$
100
110
120
Butterfly
Cost: $1.00
Buy 100 call for $6.00
Sell 110 call twice at $3.00 each
Buy 120 call for $1.00
How it Makes Money
The Retail Trade...Made Better
Call Butterfly
+$
-$
100
110
120
Insurance Leg
Do we want this option to make money?
No!
The Retail Trade Made Better
Call Broken Wing Butterfly
+$
-$
100
110
120
125
Move insurance leg further OTM
Benefits of Broken Wing
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Lower cost of insurance wing:
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Entry cost can be a credit
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Profit even if wrong on stock direction
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Increased theta - can lead to faster profits
Trade off: faster stock movement isn’t good
General Entry Criteria
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Use OTM options in direction you think stock will go
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If no opinion, can still trade it
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Profit from time and expected stock range
Strike selection
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Support, resistance, expected stock range
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Place body at end of expected stock range (16∆)
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16∆ call for bullish; 16∆ put for bearish
General Entry Criteria
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Time
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•
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1-6 weeks till expiry
1-3 weeks is ideal
Great trade for weekly options
Volatility
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Vega negative
Higher vol leads to higher credits and/or wider
butterflies
Review
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Broken wing is a variation of the butterfly
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which is a retail version of 1x2 ratio trade
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Makes money primarily through theta
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Can work in just about any market
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Make money even if wrong on stock move if
executed properly
Preview of Video 2
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Trading Bullish Broken Wing Butterflies
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Specific examples
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Management rules
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Deeper look at risk graphs
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“Knowing” when to get out