SMB CAPITAL Broken Wing Butterfly

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Broken Wing Butterfly Video One: Overview

Overview Must-have strategy for every option trader Can work in any market; up, down, stagnant, volatile Broken wing butterfly is variation on popular professional trader strategy Theta trade; make money over short time frames Make money if wrong on stock move; make MORE money if right on the stock move General entry guidelines

The Professional Trader’s Trade

The Professional’s Trade +$ - $ 1. Buy one call for $6.00

The Professional’s Trade +$ - $ 1. Buy one call for $6.00 2. Sell higher strike call for $3.00

The Professional’s Trade +$ - $ 1. Buy one call for $6.00 2. Sell higher strike call for $3.00 3. Sell a total of two calls 1x2 Trade Ratio

The Professional’s Trade +$ - $ 100 110 120 Cost: Even money Buy 100 call for $6.00 Sell 110 call twice at $3.00 each Risk: Unlimited, but only with stock higher None if stock goes lower Reward: $1,000

The Professional’s Trade +$ - $ 100 110 120 Risk: Unlimited, but only with stock higher None if stock goes lower Naked short one 110 call Not allowed to trade, or Huge margin requirement

The Retail Trader’s Trade

Butterfly The Retail Trade +$ - $ Cost: $1.00 Buy 100 call for $6.00 110 120 Butterfly Cost: Buy 100 call for $6.00 Sell 110 call twice at $3.00 each $1.00 Buy 120 call for $1.00

How it Makes Money

The Retail Trade...Made Better Call Butterfly +$ - $ 100 110 120 Insurance Leg Do we want this option to make money? No!

The Retail Trade Made Better Call Broken Wing Butterfly +$ - $ 125 Move insurance leg further OTM 100 110 120

Benefits of Broken Wing Lower cost of insurance wing: Entry cost can be a credit Profit even if wrong on stock direction Increased theta - can lead to faster profits Trade off: faster stock movement isn’t good

General Entry Criteria Use OTM options in direction you think stock will go If no opinion, can still trade it Profit from time and expected stock range Strike selection Support, resistance, expected stock range Place body at end of expected stock range (16∆) 16∆ call for bullish; 16∆ put for bearish

General Entry Criteria Time 1-6 weeks till expiry 1-3 weeks is ideal Great trade for weekly options Volatility Vega negative Higher vol leads to higher credits and/or wider butterflies

Review Broken wing is a variation of the butterfly which is a retail version of 1x2 ratio trade Makes money primarily through theta Can work in just about any market Make money even if wrong on stock move if executed properly

Preview of Video 2 Trading Bullish Broken Wing Butterflies Specific examples Management rules Deeper look at risk graphs “Knowing” when to get out