[00:00] all right all righty so in today's video we're going to be talking about how you can potentially turn a $100 into a ,000 every single day yes so for this
[00:12] strategy it is a very high risk reward ratio you can really get much more than what you're risking but that is only if you can get it into the profit zone now in fact this is actually a very very popular strategy especially among those
[00:26] Traders they like to trade those zero DTE options now I personally do not trade that much zero DTE if not at all and I'll explain a little bit why later on but if you're interested in this kind of strategy then I'm going to give you
[00:39] you know a deep dive into this strategy as to you know how feasible it is and also what are the pros and cons of this strategy and also at the end I'm going to share with you how you can put on this strategy if you want to trade this
[00:52] right so what is this strategy now this strategy is none other than the butterfly right so the butterfly is a very high risk reward ratio strategy and I'm going to show you exactly how to construct now the butterfly has two
[01:07] versions of it or two flavors like what I would say right you have the put butterfly and then you have the call butterfly so the butterfly is generally a directional kind of strategy because you have to decide you know where you
[01:20] think the market is going to go if you think the market is going to go down going to go up then you want to put on the call butterfly now this is slightly different from the other strategy which is called the iron fly or rather the
[01:35] Iron Butterfly so basically the iron fly is a combination of put and call options right that is more of a neutral strategy and for the irly it's more of a credit strategy so to speak right because you'll be given the credit up front and
[01:49] at the end of the trade it depends on whether are you able to capture you know you'll keep the credit otherwise you may have to return back back some of the credit that you keep now for the butterfly strategy it's the opposite
[02:04] right instead of receiving the credit up front you actually have to pay a debit let's say for example if it does not get inside the profit Zone then you do not
[02:17] strategy now if you actually get it into the profit Zone then it depends on which part of the profit Zone and then from there you calculate the difference and
[02:29] butterfly so the put butterfly has three legs right so let's go to the very first L first so the first L is a long put option so the long put option generally
[02:42] is one where you want to put it out of the money right so out of money for put options is basically anywhere below the current market price so as you can see down here the current market price is 17986 so anything that is below this
[02:56] price would be considered out of the money so the very first leg of the put butterfly is a long put that is out of the money now the second leg is where you define your short strikes so your short strikes this is where you want to
[03:09] put on two short puts down here and this is slightly further out of the money which is below the long putut now the last leg is basically another long put and this is where you define your max risk right if you do not have this at
[03:24] all what it does is that if the market continues to go down then you're going to lose a lot of money right right but because we have this uh long put down here let me just remove this so because we have this long put down here
[03:36] fact you already have your max loss defined so you cannot lose more than what you risk on this trade so this is for the put butterfly now if you want to
[03:48] take a look at how the put butterfly profit zones are then you can see it visually on this chart down here so as you can see the profit zone for the butterfly is actually not that big right as you can see it's only limited to this
[04:02] Zone down here right in between your two long put options right so that is the reason why you're actually able to get a pretty high risk reward ratio mainly
[04:14] because your probability of profit right your win rate is not going to be that high and I'm going to get into that into more details St on but for now you can the direction right let's say for example if you think the market is going
[04:30] down then you want to put on the put butterfly but you must also get it correct right in this zone right because if it goes down and it shoots past this Zone then you're going to be in a loss as well now for the call butterfly it's
[04:43] simply just the opposite right so for the call butterfly anything that is above the current market price is considered out of the money right again down here this is the long call anything above this is considered out of the
[05:00] money now the second link is two short call so this is slightly further out of the money so this will be again the tip of the tent so if you're not sure what is this tent I'll show you later on as we get into the p&l graph but basically
[05:13] you need to have two short call options down here and then the final L is one long call that is even further out of the money and the same as well this is where the profit zone is right in the middle down here so it's not just enough
[05:27] for you to get the direction right right so for example if you think the market is going up it has to go up to just nice this Zone down here it doesn't go inside this Zone if it's let's say for example it fall short down here then you're
[05:41] going to lose money or if it overshoots it and it goes above your butterfly structure then you're going to lose money as well so now we know the two have the call butterfly now the next thing we need to decide is what
[05:56] underlyings do we trade it on so one of the things that that you need to consider when you're trading the butterfly is where your short options are right so let me just remove this drawings down here so if you take a look
[06:08] at the call butterfly you notice there is this two short call options down here which means to say let's say for example if the market goes here and let's say it goes to2 at expiration you will be in the profit zone right so you'll be in a
[06:23] profit you'll be making money but the problem is that right now you could actually get assigned because this is two short calls so if you actually get assigned then you're going to be shot 200 shares of the underlying and this is
[06:37] where it can get messy because if you're not sure how to unwind any assignment then you could get into you know a margin call so the best part is to just problem of having to unwind it so that is why when you're choosing an underline
[06:53] to trade the butterfly is very important and for this what I would suggest is to trade the cash settle index option options right so the cash settle index options basically like the SPX and the XSP so with the cash settle index
[07:06] options there is no early assignment and it's cash settle that means there's no assignment of shares whatsoever so what that means is that because this is zero DTE all you got to do is just enter into trade and just leave it all the way to
[07:18] expiration and just see right are you in a profit or a loss if you're in a profit let's say it's in a loss then there's nothing for you to take back right basically the debit that you paid up front is all gone and you do not have to
[07:33] face any assignment of shares so this you can put it at like a set and forget kind of strategy right just put it on once at the start then leave it all the way to expiration it's much more cleaner much more neater now let's get into the
[07:48] pros and cons of this butterfly strategy so it's very tempting for many people to want to put on this butterfly strategy because most people just see that you put it on for maybe 50 bucks or so or even 100 bucks and sometimes even lesser
[08:04] right depending on how you structure it so that is why many people you know like to trade this strategy but you need to really understand this strategy before you you know you just go Dive Right In just to put on money and then just to
[08:16] trade this you need to understand what are the pros and cons before you trade any strategy all right so let's first get into the pros so the pros the very first one is that it has a very high risk to reward rate ratio right as you
[08:30] can see it can be like 1 is to 10 or higher right so as you can see down here the max loss is $45 but the max profit is $450 that is about 10 times your money that means that you can actually lose you know about eight times and if
[08:45] you just win one time you're still going to be in a profit right so this is one of the big Leo for many people that they that's the reason why they want to trade this strategy now the next Pros is that it can potentially realize a a
[08:59] significant profit every day so if you are very good at picking a direction and you know roughly where the market is going to be at expiration then this can give you a very very big payoff right as you can see again the risk is so little
[09:13] right and each time if you were to land it in this profit Zone down here you can potentially get quite a bit right so if you're good at picking Direction then this is a pretty good strategy for you to put on and the final Pro is that you
[09:26] trade is just $45 so even though if you have an account that is very small right maybe you start off with you know $1,000 or a couple of thousand dollars this
[09:39] will take a very small percentage of your total Capital so again this is why a lot of people you know get very enticed by using this strategy now that we know the pr we need to know the cons as well because although this paints a
[09:53] very beautiful picture and it makes it like wow you can really make a lot of money you need to understand understand the cons and the cons can be pretty big and it can be a deal breaker for some people so the very first cons is that it
[10:06] has a very very low win rate guys take a look at this this is just about 10% win rate that means to say out of 10 trades most of the time you're probably just going to win one only right so this is one thing you have to really understand
[10:22] and the big big thing that you really need to understand is losing streaks by click the thumbs up button and also do get your free copy of the options income blueprint where I share the top three options strategies that help you
[10:37] generate a consistent income each month trading just one to two hours a day right so if you want to go ahead to get this copy just head on over to options with davis.com blueprint all right back to the video how many losses in a row
[10:50] can you actually sustain when your trading is strategy that has only about a 10% win rate so as you can see this table down here it shows the probability of you know how many consecutive losing trades that you have within a 100 Trade
[11:05] sequence so let's say for example if you put on this uh butterfly trade for 100 trades in a row how many potential losing streaks in a row can you have so if you take a look at this I already put the column down here I've highlighted
[11:19] the 10% win rate one which it coincides with this butterfly strategy I've constructed so you can see down here for you to get 10 losing streaks in a row right that means you lose and lose and lose 10 times in a row is a 100% what
[11:34] this means is that sooner or later when you're trading this strategy you're going to get at least 10 losses in a row right or even more right and it's chances are that it's going to be even more right it just stops at 10 but I've
[11:48] to even 11 12 13 14 maybe even 15 right so this is one thing to understand so if you're those kind of person that you know you want to win more often
[12:02] because imagine this you're going to put on a trade you lose you put on a trade again you lose and you put 10 to 11 trades in a row and you still lose this
[12:14] is going to be very difficult for you to put on the next trade again because at the back of your mind you're going to be you know worried that the next trade is going to be a loser so it's very very difficult to put on even though let's
[12:26] say for example at the end of the day it could be a positive Edge you know if for example you have certain management style way of managing this uh butterfly or maybe you're good at technical analysis you're able to you know predict
[12:39] where the price can go but even so you still have to face a pretty long losing streak so this to me is actually a very very you know big big deal breaker for such kind of strategy now the final cons is that not only do you have to be right
[12:58] in picking the direction you also have to be right at where it settles at expiration you can see down here this is the market price now one part of it is go down now the market can go down but it may not necessarily mean that you
[13:16] will be profitable because you need to have it right in this Zone at expiration and you can see the chances of you getting it right expiration is about 10% so again that is why you know this can be a pretty difficult strategy to
[13:30] continue using especially you know if you keep losing over and over again and you're not able to get that winner right at the start right you're going to just see your account going lower and lower right just losing money over and over
[13:44] again so these are the pros and cons and you really need to digest this before you decide hey whether this is a strategy that is suitable for you now if this strategy then here are four simple steps for you to trade the butterfly
[14:00] right so the very first step is to pick a direction right either up or down it's going to go down choose the put butterfly now that you have picked the Direction step number two is to choose either the zero DTE or one DTE so I
[14:17] know more time in the trade you can go for one DTE if you want it you know during the day and then close it by the time the market is closed then you can
[14:29] go for the zero DTE so either one would be fine and then step number three this is the important one this is where you need to choose your short strike Delta right so the higher your Delta the higher the chance of being in profit but
[14:44] lower risk to reward ratio so you need to understand that there's a trade-off column so you can see for this strike down here or rather this butterfly that we've constructed down here this is on the put side by the way so for this put
[14:58] butterfly fly we have chosen the 32 Deltas so we have also chosen you know example so this butterfly as you can see it gives you a 1 is to6 risk to reward
[15:12] see down here this is where the market price is this red line at the right hand side so this red line down here is where the current market price is and your
[15:25] somewhere near this triangle or rather this tent is pretty high but if you were to go for the one with a lower Delta then this is the trade-off right you
[15:37] have a lower chance of being in profit because now it's slightly further away from where the current market price is but you actually have a higher risk reward ratio so as you can see down here the risk reward ratio is 1 is to 11
[15:51] whereas the one before that is 1 is to six so it's roughly double the risk to reward ratio but again the tradeoff is that you're going to have a lower chance of you actually getting into that Max profit Zone and finally step number four
[16:05] is to Define your wings right should you go for a very very narrow Wing or should you go for you know very wide wings so again it's all a trade-off so the narrower your wings the higher the risk reward ratio but the lower the
[16:20] probability of profit which is the win rate so as an example this is a fivepoint wide butterfly right the wings are fivepoint wide as you can see the short strike is 4830 and the wings above and below is just 5 Points away right so
[16:35] by the way this is on the SBX so you can see with this you actually have a 1 is to 22 risk to reward ratio which is pretty insane right for every $100 you put in you can potentially get $2,200 right but the trade-off is that
[16:52] your win rate is only about 10% so that's not very very high all right but if you go for a wider Wing then you're going to have a higher win rate so as you can see down here your win rate almost doubled to 18% but your RIS to
[17:06] reward ratio basically just shrink by half right so this is 1 is to 11 risk to know you know do you want to go for a wider uh butterfly and this way you get
[17:20] at least a higher win rate but you know your trade-off is that you have a slightly lower RK to reward ratio which is actually not bad right 1 is 11 or maybe you want to go for a much much higher risk ratio so this way at least
[17:33] you know that once you get one right just all you have to do is just get it into the max profit Zone one time then you're going to have a very big payday right again the trade-off is a very very low win rate so this is where you need
[17:46] to decide all right so this is how you can potentially turn $100 into $1,000 or more every single day the win rate is very very low but if you get it right
[17:59] and you get it into the profit Zone then you can get a really really big payoff by the way if you like this video then you absolutely going to love this next video which I have for you so go ahead and watch that video right now also if
[18:12] can do so just by clicking this link down here on your screen and you'll be able to get it for free all right I will see you in the next video