In the video “If You’re Afraid of Losing, Then Trade This…(SAFEST Options Strategy For Beginners)” by Options with Davis, you will learn about a safe options selling strategy for beginners. The strategy is called the put broken wing butterfly and it combines a put credit spread and a put debit spread. By using the premium received from the put credit spread to finance the put debit spread, you can potentially have a high win rate and a favorable risk-reward ratio. This strategy has a defined risk, meaning there is no unlimited loss potential, and it can be constructed to make money regardless of market direction. If you’re interested in learning more, the video also mentions that you can get a free copy of “The Options Income Blueprint” and check out other related videos for more information.
The Put Broken Wing Butterfly Strategy
Definition
The Put Broken Wing Butterfly Strategy is an options trading strategy that combines a put credit spread and a put debit spread. It is designed to provide a defined risk and a potentially high win rate for traders. By using the premium received from the put credit spread to finance the put debit spread, traders can create a strategy with a favorable risk-reward ratio.
Components
The strategy consists of two main components: the put credit spread and the put debit spread. The put credit spread, also known as the Bull put Spread, is a bullish strategy that involves selling a put option at a certain strike price and buying a put option at a lower strike price. On the other hand, the put debit spread is a bearish strategy that involves buying a put option at a certain strike price and selling a put option at a lower strike price.
To construct the put broken wing butterfly, both the short put of the put credit spread and the short put of the put debit spread must have the same strike price. The premium received from selling the put credit spread is used to finance the purchase of the put debit spread.
Risk-Reward Ratio
One of the benefits of the Put Broken Wing Butterfly Strategy is its favorable risk-reward ratio compared to other premium-selling strategies. Because the strategy has defined risk, there is no unlimited loss potential. Traders can determine their maximum loss upfront, which helps manage risk.
The risk-reward ratio of the strategy can vary depending on how it is constructed. It is important for traders to choose the right strikes and adjust their positions accordingly to maximize their potential profit and minimize their risk.
Benefits of the Strategy
Defined Risk
One of the key benefits of the Put Broken Wing Butterfly Strategy is its defined risk. Unlike some other options strategies, where the potential loss can be unlimited, the maximum loss for this strategy is known upfront. Traders can calculate and manage their risk based on the strikes they choose and the premium received from the put credit spread.
High Win Rate
The Put Broken Wing Butterfly Strategy has the potential for a high win rate, potentially above 87%. This means that the strategy has a high probability of being profitable for traders. However, it is important to remember that there is still a chance of losing money, as no strategy is foolproof.
Cash-Settled Index Options
Trading the Put Broken Wing Butterfly Strategy on cash-settled index options can eliminate the risk of early assignment. Cash-settled options are settled in cash at expiration rather than being exercised for the underlying asset. This reduces the complexity and potential risks associated with early assignment, allowing traders to focus on managing their positions.
Favorable Risk-Reward Ratio
The Put Broken Wing Butterfly Strategy offers a favorable risk-reward ratio compared to other premium-selling strategies. Traders can determine their maximum loss upfront, which helps them manage their risk. The potential profit, on the other hand, can be significant if the market moves in the desired direction.
Omnidirectional Trade
The Put Broken Wing Butterfly Strategy is an omnidirectional trade. This means that traders can potentially make money regardless of the market direction. If the market goes down, the strategy can profit. However, even if the market goes up, traders can still make money due to the structure of the strategy.
Constructing the Strategy
Put Credit Spread
To construct the Put Broken Wing Butterfly Strategy, traders first need to create a put credit spread. This involves selling a put option at a certain strike price and simultaneously buying a put option at a lower strike price. By combining these two options, traders can receive a premium upfront.
Put Debit Spread
Once the put credit spread is established, traders can create the put debit spread. This involves buying a put option at a certain strike price and simultaneously selling a put option at a lower strike price. The premium received from the put credit spread can be used to finance the purchase of the put debit spread.
Using Premium to Finance Debit Spread
The main goal of the Put Broken Wing Butterfly Strategy is to use the premium received from the put credit spread to finance the put debit spread. By doing so, traders can reduce the overall cost of the strategy and potentially increase their potential profits. This allows for a more favorable risk-reward ratio.
Explanation of Components
Put Credit Spread
A put credit spread, also known as a Bull put Spread, is a bullish options strategy. It involves selling a put option at a certain strike price and simultaneously buying a put option at a lower strike price. The premium received from selling the put option is the maximum potential profit for the strategy.
Put Debit Spread
A put debit spread is a bearish options strategy. It involves buying a put option at a certain strike price and simultaneously selling a put option at a lower strike price. The premium received from selling the put option helps reduce the overall cost of the strategy.
Combining the Spreads
To create the Put Broken Wing Butterfly Strategy, traders combine the put credit spread and the put debit spread. By using the premium received from the put credit spread to finance the put debit spread, traders can create a strategy with a defined risk and potentially high win rate.
Risks and Considerations
Limited Profit Potential
While the Put Broken Wing Butterfly Strategy has defined risk, it also has limited profit potential. The maximum profit for the strategy is reached when the market moves to the short put strike price. Beyond that point, the potential profit decreases and eventually turns into a loss.
Market Direction
The success of the Put Broken Wing Butterfly Strategy depends on the underlying market direction. If the market moves in the desired direction, traders can potentially profit. However, if the market moves against the strategy, traders may experience losses. It is important to monitor market trends and adjust positions accordingly.
Margin Requirements
When trading options, traders need to consider margin requirements. Margin is the amount of money required to open and maintain options positions. The margin requirements for the Put Broken Wing Butterfly Strategy will depend on the specific strikes chosen and the amount of capital available.
Tips for Success
Choose the Right Strikes
Choosing the right strikes is crucial for the success of the Put Broken Wing Butterfly Strategy. Traders should consider the current market price, volatility, and their own risk tolerance when selecting the strikes. It is important to find a balance between potential profit and acceptable risk.
Manage Positions with Adjustments
Monitoring and managing positions is essential when trading the Put Broken Wing Butterfly Strategy. If the market moves in the desired direction, adjustments may be necessary to lock in profits or protect against potential losses. Traders should be proactive and make adjustments based on market conditions.
Be Mindful of Expiration Dates
Expiration dates play a significant role in options trading. Traders should be mindful of expiration dates when trading the Put Broken Wing Butterfly Strategy. It is important to close out positions or roll them over before expiration to avoid potential risks and fees associated with exercising or assigning options.
Comparison with Other Strategies
Naked Options
The Put Broken Wing Butterfly Strategy offers a defined risk, unlike naked options strategies. Naked options involve selling options without owning the underlying asset, which can result in unlimited loss potential. The Put Broken Wing Butterfly Strategy provides traders with a known maximum loss upfront.
Iron Condor
The Put Broken Wing Butterfly Strategy shares some similarities with the Iron Condor strategy. Both strategies involve combining different options spreads to create a defined risk strategy. However, the Put Broken Wing Butterfly Strategy is more versatile and allows for potential profit regardless of market direction.
Vertical Spreads
Vertical spreads, such as the put credit spread and put debit spread used in the Put Broken Wing Butterfly Strategy, are popular options trading strategies. While vertical spreads offer limited profit potential, the Put Broken Wing Butterfly Strategy combines these spreads to create a more favorable risk-reward ratio.
Getting Started
Educate Yourself
Before trading the Put Broken Wing Butterfly Strategy or any other options strategy, it is important to educate yourself about options trading. Understand the basics of options, including terminology, strategies, and risks. There are many resources available, such as books, online courses, and educational videos.
Use Paper Trading
To gain experience and test different strategies, consider using paper trading. Paper trading allows you to simulate real trades without using real money. It can help you become familiar with the mechanics of options trading, practice executing trades, and analyze the results.
Seek Professional Guidance
If you are new to options trading or feel unsure about trading the Put Broken Wing Butterfly Strategy, consider seeking professional guidance. A financial advisor or options trading specialist can provide personalized advice and guidance based on your specific financial goals and risk tolerance.
Additional Resources
Free Copy of ‘The Options Income Blueprint’
For more information and in-depth knowledge about options trading, get a free copy of ‘The Options Income Blueprint.’ This resource provides valuable insights into various options strategies, including the Put Broken Wing Butterfly Strategy.
Related Videos by Options with Davis
Options with Davis offers a range of educational videos related to options trading. Check out their video library for more information on options strategies, including the safest option selling strategy for beginners.
Online Options Trading Courses
Consider taking online options trading courses to further enhance your knowledge and skills. Many reputable platforms offer comprehensive courses that cover various topics, from options basics to advanced strategies. Explore these courses to deepen your understanding of options trading.
Conclusion
The Put Broken Wing Butterfly Strategy is a versatile options trading strategy that offers a defined risk, high win rate, and favorable risk-reward ratio. By combining a put credit spread and a put debit spread, traders can potentially profit regardless of market direction. However, it is important to carefully choose strikes, manage positions, and be aware of expiration dates. Educate yourself, practice with paper trading, and consider seeking professional guidance before implementing this strategy. With the right knowledge and skills, the Put Broken Wing Butterfly Strategy can be a valuable tool in a trader’s options trading arsenal.