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.
With SPX near key support levels a bearish butterfly looks like an interesting speculative idea. The fly, being short, can increase the speed at which it can work for us if we are correct on the downward direction of SPX. I plan to take it off when I am up or down 50% on p/l based on the trade cost.
With SPX trading around 2425:
Buy 2 Aug 25 exp. 2420 puts
Sell 4 Aug 25 exp. 2400 puts
Buy 2 Aug 25 exp. 2380 puts
Debit around 2.60
Max risk is the debit of the trade
Recently I blogged about buying VIX calls when the levels were near all time lows. I am looking again for an entry point to go long VIX. Looking to buy VIX calls if VIX level drops below 12.
Currently with the VIX trading at approximately 12.5 the Oct 18th expiration 14 calls are trading at 2.00. This means on expiration day (if you purchased that call now) if VIX was above 16 you would be profitable.
If we could enter a little cheaper when the VIX was below 12 that would be even better. The VIX has been spiking to the 14/15 area about every 4 to 6 weeks over the past several months.
We are now heading into September and October which are traditionally volatile months so I expect the same should be happening again. If you purchase the call(s) look to sell them on a VIX price spike, which can be short lived, so you have to monitor this trade closely.
I have no set profit target, just looking to let the calls be in place to sell at a nice profit when volatility rises.