Recently I wrote an article about the “time bomb butterfly” that was published in the March issue of Modern Trader Magazine. The butterfly option trading strategy has many different structures and uses.
The time bomb butterfly involves buying an out of the money all call or all put butterfly in the direction you think an underlying asset is going to trade.
Currently in the market there is a lot of uncertainty among traders as to which direction the market will now head.
Time Bomb Butterfly
This can be a good set up for the time bomb butterfly in the SPX. One example would be an all put butterfly placed in the April expiration 37 days from now, that is centered at 1940. While the width of the fly is up to the individual trader, using a 20-point wide wing could be structured as follows:
Buy 1 APR 16 1960 put
Sell 2 APR 16 1940 puts
Buy 1 APR 16 1920 put
This butterfly is currently trading at approximately 1.25 per contract, costing $125 for each 1/2/1 fly structure that is entered plus commission.
If this butterfly at expiration is trading near 1940 this trade would net more than a 10 fold profit. It also has profitability from around 1925 to 1955. If you have a bearish sentiment over the next month for the SPX this is an interesting trade to consider.
Consider the Time Bomb Butterfly
I like using the time bomb butterfly strategy more than vertical strategies because of the low cost and possible exponential reward. Consider the time bomb butterfly the next time you want to trade predicting market direction.