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Butterfly SpreadsBy Rick Ackerman Most traders are aware that put and call options offer leverage with limited risk. But did you know that one type of option spread called a butterfly can yield odds of 50-to-1 with an initial outlay of $100 or even less – sometimes much less? As an example, suppose you were bullish on TSLA, believing it could climb from $850 to $1100 in a month. This is hardly a stretch, given that Tesla shares actually rose from $615 to $885 in just two weeks at the end of 2020. So here’s the play: With the stock selling for a current $845, one-month butterfly spreads that could eventually fetch as much as $5,000 are currently available for as little as $100. Now get this: If TSLA is trading anywhere between $1051 and $1149 when the options expire, the position will be a winner. That’s right: It will pay off with TSLA in a nearly $100 range. Here are some other uniquely appealing features of this bet:The most you can lose, even if the underlying stock falls to zero, is the $100 you paid.If TSLA rallies sharply right away, you’ll be able to cash out of the spread for perhaps 5-20 times what you paid well before the options expire.With a little work and judicious timing, it’s possible to leg into butterfly spreads for a small credit. This means that if you do the spread ten times for a $100 credit, you are guaranteed to make $1000 no matter what the stock does. But you’ll also have a shot at making as much as $50,000 if TSLA hits $1100 exactly.Adjusted for risk, the spread beats buying naked calls by a mile. In this example, calls at the 1100 strike are priced at about $2300, meaning they will be losers with the stock trading below $1123 at expiration.It is the cheapest, least risky way to bet on a big moves, often getting odds that no bookie would lay. You can see why relative novices looking to trade on a shoestring budget love butterfly spreads. They are enormously popular in the Rick’s Picks chat room, and once subscribers have discovered them, many use them in place of all other strategies. To get a feel for how butterflies work, check out the recording. It provides all the information you need to get in and out of the spreads and to extract maximum leverage using ‘Hidden Pivot’ price targets.There’s also an easy exercise you can do to help you master the price dynamics of butterfly spreads as the underlying stock moves up, down or sideways. And you’ll find a quick primer on using put butterflies if you are very bearish but don’t want to risk much betting on it. Finally, there’s a discussion of a trick mentioned above – i.e., legging into spreads so that risk is entirely eliminated. ................
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