What is a Butterfly?
A butterfly is a neutral options strategy with both limited risk and limited potential profit.
How does one place the trade?
The butterfly is a combination of vertical spreads. It is a limited risk, limited reward strategy. There are 3 strikes prices in a butterfly and it can be done using calls or puts.Butterflies consist of four options contracts with the same expiration at 3 different strike prices.
What are the Benefits of ETFs?
ETFs are seeing such massive growth specifically because of the benefits they offer. Aside from their “passive” aspect and how much simpler ETFs are to trade over mutual funds, there are financial benefits. Mutual funds generally have penalties involved.
When you invest in a mutual fund, you’re investing through the company that manages the fund. If you sell your mutual fund before a specified length of time (usually 90 days) there is often an extra cost involved, generally 1% of the shares’ value. ETFs, on the other hand, have no minimum holding period. You can buy and sell ETFs as quickly as you like without penalty since they’re traded like a stock.
There are also tax advantages to trading ETFs over mutual funds. ETFs and mutual funds are both taxed each year based on the gains and losses within your portfolio. But ETFs have less internal trading, which creates fewer taxable events. If your portfolio is only filled with ETFs, there is only tax on your sells.
Due to low costs, ease of trading, and the ability to provide exposure to various sectors and market segments with limited risk, ETFs offer traders strong profit potential.
Pro's and Con's
- Managed Risk, meaning max loss is what you paid for the trade overall.
- This strategy allows the trader room for potential profit if the stock price does not rise or fall significantly until the expiration date.
- Limited upside potential. Even if you are correct, you are limited in profit potential.
- Must have an understanding of market direction and neutrality - best achieve with indicator support.
Example of a Butterfly in RTN: