The butterfly option is basically the option position that is comprised of two vertical spreads with common price. The butterfly option involves an opening position wherein options (Calls and Puts) are bought or sold at three different strike prices. This option is has both limited losses and limited profits. It is common to hear or read that equity options expire on that third Friday. While that isn’t technically correct, it is true that Friday is the last opportunity to trade those options. Saturday expiration was established to give the brokerages time to settle the accounts before the options technically (legally) lose their value. When you are working in the stock market, you must be patient. Take your time in order to get the most out of a stock, with time earnings will grow and losses will diminish. The only thing that limits your time frame is the expiration date that is traditionally assigned to some options, so be sure to close them before they expire. Charting stocks has helped me find several profitable option trading opportunities, and it’s a skill that becomes easier over time. Trading Options Rules To the surprise of most people, the steps involve in making an investment in the stock market is not difficult to follow.
The other advantage with options is that you can buy different types of options, depending on your view of market direction. If you think the price of a share will rise, you can buy a call option, but if you think it will fall, you can buy a put option. But the “wow” factor with options really comes into play when you realize that you can also “write” or “sell” an option contract, in a way that allows you to create it out of nothing. Then if you start combining the buying and selling of different option contracts on the same underlying share, simultaneously, you are talking “spreads”. Some options can also be purchased as a form of “insurance” on shares you already own. A lot of stock companies online have many systems of inventive and offers that they will give to you once you do a certain volume of trades on a very regular basis. This can be as little as $1 a trade or as high as $50 a trade, depending on the volume, and while it may seem like a paltry amount at first, but soon the amounts will be adding up and they will make a difference in your capital management.
If the option you buy is to sell securities, then it’s referred to as a put option. Some traders even go so far as to purchase both calls and puts on the same stock, with agreed prices and by an agreed date, then it can be called a double option, or sometimes a put and call option. The hardest part of options trading is understanding all the jargon. But options have “strike prices”, “expiry dates”, ‘implied volatility”, “in and ‘out of’ the money” factors…. all of which allow you far greater flexibility in adjusting your position as you see the market direction forming. When buying shares, you simply buy and hope you’ve got it right, but with options, if the market turns against you, you can always salvage your position. You may never trade the same way again! Here’s the harsh reality. But, the problem is they think they can take small profits and large losses and still survive. It is proper risk management that takes options trading out of the realm of gambling and into the realm of investing and trading.
One area that stands out and magnifies this problem is commodity options buying and selling. Commodity account risk management is more difficult when the profits are small. One is the long butterfly that can be created by either employing call options or all put options. Because of put-call parity, the long butterfly that is generated from call options will behave like a long butterfly that is created using put options. This is actually a combination of two opposing vertical spread options thus the name butterfly spread. For example, if I hold a bull put spread and the underlying stock closes Friday of expiration week at a price within the spread, my short put options will be exercised against me, resulting in a long stock position in my account. The long put option does not protect me because it expired worthless. In general, if the stock price closes on expiration Friday within the strike prices of my vertical spread, it will result in either a long stock position or a short stock position in my account the following Monday. These are investment banks, commercial banks, and end users, such as floor traders, corporations, and hedge and mutual funds.