An extraordinary trade for options investors who believe that the stock or index / ETF they are working with will be limited for the next 2-3 weeks to about a month is called the butterfly spread.
This theta positive options trading system generates income for the trader when the primary underlying or index / ETF it is traded on remains traded within a somewhat contained range on the chart – or – when the trading vehicle ends on the expiration day on or at the close to strikes sold from the trade.
Here is an illustration of this options strategy: Buy 2 QQQQ 44 call contracts. Sell 4 QQQQ 46 call contracts. Buy 2 QQQQ 48 call contracts. This is a "classic" butterfly spread position – a 3-legged options strategy trade.
Butterfly spreads produce fantastic transactions for income traders due to the fact that the short strike (the strikes that are sold) provides favorable premiums to the trader up front due to the fact that they are sold “ for money '' – or very 'close to the money'.
While it is a fact that regular butterfly spreads are executed for a debit (rather than a credit like what the iron butterfly strategy trade gives off) – nonetheless – even so – these are the short strikes that we sell that will deteriorate over time. left to expire and return to the trader's earnings.
The butterfly trading strategy is considered a "delta neutral" options trading strategy. Investors using this technique expect the underlying to continue to be at the general location on its chart from where it was when the spread trading was initially initiated. Unless the investor attempts to place – or is considering placing a trade based on direction, strikes in butterfly spreads are normally sold for money – during this time butterfly longs are sold far away short strikes usually at an equal distance and reach apart on each side.
The Butterfly Strategy, when traded accurately, can be an extremely enjoyable and financially rewarding way to trade in the market to generate regular and consistent profits.