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, there is a lot of uncertainty among traders as to which direction the market will head. 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 Oct 6th expiration 31 days from now, that is centered at 2420.
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 Oct 6th 2440 put
Sell 2 Oct 6th 2420 puts
Buy 1 Oct 6th 2400 put
This butterfly is currently trading at approximately 1.00 per contract. costing $100 for each 1/2/1 fly structure that is entered plus commission. If this butterfly at expiration is trading near 2420 this trade would net more than a 10 fold profit. It also has profitability from around 2440 to 2400.
If you have a bearish sentiment over the next month for the SPX this is an interesting trade to consider. I like using the time bomb butterfly strategy more than I like vertical strategies because of the low cost and possible exponential reward.
Consider one of these the next time you want to trade predicting market direction.
I also wrote an article about the “time bomb butterfly” that was published in the Modern Trader magazine which you can check out below.