Monday, November 27th, 2017

How to trade a Time Bomb Butterfly

Dan Sheridan of CBOE fame coined the phrase ” Time Bomb Butterfly” few years ago. Now its like a normal phrase on the Internet. I get get asked all the time do you trade any time bomb butterflies ? Yes we do, in fact we learned the ” craft” from Dan Sheridan in many ways. Dan is a great instructor and with a zest of driving home a point.

So whats a Time Bomb Butterfly? Its an out of money Butterfly with low probability of success and its cheap to put on. Sometimes you can put these out of the money butterflies for pennies and the rewards can be astronomical if you are right about the direction of the market.

Lets suppose SPX is trading at 1320 levels in January and you have an idea the market is trending and will go higher. At least that is what you believe and know to be best course for the SPX to take in next few days. So if you placed a cheap butterfly at 1340 which will cost say $.70 or less you can see the rewards are magnificent. If the mosquito lands in the net as Dan would say you can possibly make $4000 max profit. Click on graph to enlarge:

What is also illustrative from the option graph is that this kind of chart is very  very forgiving if we are wrong.  Suppose you were wrong and SPX only made it to 1330 levels the rise in the middle of the chart by the white line shows that you will still make some money with the passage of time. If you were entirely wrong and SPX dropped below 1300 you will incur a small loss.

The white line is where one should look for profitability and the not the red lines on expiration because you would rarely hold this to expiration. Holding on till expiration may result in greater losses and you can entirely lose .70 cents debit. These time bomb butterflies are very forgiving to novice traders and when they are wrong. Its just a slap on the wrist and once you know the market is going in the other direction you can do some risk management and close the trade.

We have been trading these Time Bomb Butterflies lately and have reaped decent profits. The art of of placing these lies in the Technical analysis and if you are right the results are impressive. I have yet to lose all my debit on any of these. If the trade goes against me I would close it at 15 % max loss and that is it.

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7 Responses to “How to trade a Time Bomb Butterfly”
  1. This trade has low risk and a potential good return.

  2. serena says:

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  3. tsw gold says:

    Hope I am not sounding like a bear, that is what they do all the time, they keep wishing for the downside. I am looking for an entry and just not wishing.


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