Are you a market bear? Here is a trade for you.
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.
Profit
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.
You could of course, using an all call time bomb butterfly, structure something similar above where the SPX is currently trading.
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.
Thank you for taking the time to explain this strategy, Mark. After playing around and backtesting this for a few days after reading, it seems the crux is selecting that middle strike. It’s challenging enough estimating ITM or OTM at expiration. Being ATM at expiration (of course with 30 points of play in the scenario given), seem like quite the gamble. Do you have any insight into placing that middle strike? Is this strategy any more successful with shorter expiration times, given the smaller range of possible strikes in the compressed timeframe? Thank you again for the article. It’s been fun exploring the time bomb butterflies possibilities/probabilities. One thing that I was playing around with is funding the trade with a short put or call butterfly. If you had some conviction on being bull or bear, at least adding the short on the other side makes you break even or profitable the entire opposite direction, rather than just between your strikes.
Since landing AT the center strike would return 10x the debit. And, since the cost is relatively a low outlay, then why not place 3 of these.
1- Below
2- ATM
3- Above
If they are each around $1.40 then you would lose $2.80 and make 10x on 1 of them.
Of course you would have to go very wide to cover A LOT of territory!