0DTE Butterflies: 5 Smart Ways to Trade Them

[00:02] percent. It's not for the faint-hearted and on average it's about 10% a month. >> My average whole time is about 18 minutes, John. Maria, we have new shoes and I was like, "Oh, this needs to make $300

[00:15] $300 a day." Zero DTE butterfly strategies is a fascinating, fast, and sometimes volatile way to trade options. In this video, I'm going to show you five completely different ways

[00:30] butterflies to on the same day they expire. Some traders are aiming for fast, repeatable income. Others are stacking positions throughout the day and some are going for explosive asymmetric

[00:46] returns. Where a small risk can turn into a very large gain. This video is based on previous long-form interviews here on Theta Prophets. [snorts] If you want to go deeper into any of these strategies, you find the links to the

[01:02] long-form interviews in the description below. And just to be clear, this is for inspiration and education only. These are advanced strategies and they come with risk. This is not financial

[01:17] advice. Okay, let's get into it. But first, let's make sure we are on the same page. If you're new to butterflies, I do recommend that you watch my interview with Steve Burns about butterfly

[01:31] strategies. Here is a short explanation from Steve to get you going. A butterfly can be this configuration here, which is a put previously. We got the put credit spread and the call credit spread. But the

[01:47] butterfly can also be all calls or all puts. Let me just I built a couple of those here, too. So, this one is an all put butterfly. Now, you're going to see put butterfly. Now, you're going to see it has very, very similar dynamics. It's

[02:01] got close to the same profit. It's got about the same amount of risk, actually just a touch more risk, but this one is an all put butterfly. I find it to be a reasons that we'll be covering here tonight. So, at its core, a butterfly is

[02:18] a structured trade around a specific price level. Now, let's look at how different traders actually use that structure in different actually use that structure in different ways. Let's start with Doc Severson.

[02:32] His approach is all about speed and efficiency. Instead of holding trades for hours or trying to hit the perfect expiration point, his goal is to extract profit quickly

[02:46] his goal is to extract profit quickly and reduce exposure. butterfly early in the day. The width of the spreads depends on the estimated move. This approach increases the premium and

[03:03] accelerates time decay, which allows him to get in and out much faster. This is a different mindset compared to many options traders.

[03:15] Instead of maximizing profit, the goal is to take a small, consistent share of the opportunity and move on. That to me was almost like the holy That to me was almost like the holy grail of zero DTE trades. My average

[03:29] hold time is about 18 minutes, John. My goal is to get in, get my fair share, and to get out because to me time is money. The iron fly is something that we stumbled upon, oh, probably about two, three years ago

[03:45] we could place every day in a consistent environment. And zero DTE came out on the SPX and with full 5 days, I think it was about 2 to 3 years ago.

[04:01] And so we were looking for something that we could play every day. And of course everybody starts out by putting the wings way out on the iron condors. And so what we found through experimentation was actually bringing

[04:14] them in and tightening in the iron condor, which is what an iron fly actually is, gave us the the best performing trade and the one that we spent the least amount of time managing. So let's

[04:29] look at an example. Maybe please explain this example. Okay, so the current price right now is right around 6850 on the cash index. And so that's what we're going to select as our short strike for the puts and the

[04:44] calls. So that's the very center of that iron fly pyramid, if you will. And then what we're going to do is we're going to select the the wings, which are the long options.

[04:57] And those wings are going to be based on the expected move or essentially the expected move of that day's price movement. What I'm looking for is the price range of the first 30 minutes.

[05:10] And if you think about it this way, you've got an upper and a lower expected move, right? So every time we we come into a new day, we're going to have an expected move plus and minus. So that is the statistical

[05:25] expected move that the options traders have basically said this is what we expect for the day. And there's a 68.2% chance that it will fit the the the market will close within that that range of that expected move.

[05:40] like my outer boundaries of what we're working with. And And of that should be, if it's a range day, should be the opening range, which is the first 30 minutes of the day. And that sets the tone for

[05:54] everything. So, if the price stays within the opening range after 30 minutes and doesn't appear to be trending, and if I'm not in a corrective market,

[06:07] I will I'll pull the trigger. And so, what I'll do is I'll do is I'll And so, what I'll do is I'll do is I'll immediately say like sell enter for a credit of In this case, the the trade that we're looking at today would be

[06:20] $20.85. So, the first thing I would do is I would put in a limit order for $20.35 debit to immediately close those out. Now, let's move into what happens when

[06:35] the trade goes against you, because this is a fast-moving trade both when it comes to taking profit, but I guess also when it comes to getting into negative territory if the market doesn't move your way. What are your exact rules for

[06:49] taking the loss or and putting up stop loss? I've got a spreadsheet that So, what I'll do is I'll So, what I'll do is I'll I'll enter the expected moves

[07:02] into that. So, expected move figure. And then I'll enter the entry point of that. So, say it's 6850. And the example for today that we had with a 29-point

[07:17] expected move, my stop losses would be at 6821 and 6879. And so, if the price comes down to boom, I'm out. So, this is all about speed, efficiency,

[07:33] and reducing time in the market. Now, let's look at a different style where the trader builds multiple butterflies throughout the day. We'll meet Dale Pearman

[07:47] and his quite dynamic approach to iron butterflies. Instead of placing just one butterfly, he builds positions throughout the day where what he calls fly catching. He follows clearly defined mechanics.

[08:04] The idea is simple but powerful. You don't need to be exactly right once. You just need to position yourself so that one of your flies ends up close to the closing price.

[08:17] the closing price. This approach accepts more variance, but This approach accepts more variance, but it also creates more opportunities. Elevator pitch, it's a four-legged trade.

[08:29] trade. Primarily selling at the money on SPX. Primarily selling at the money on SPX. And with very specific opening rules and closing rules in order to keep your your your losses manageable, which gives you

[08:44] a chance to have a big win every day. We call ourselves the fly catchers with the call ourselves the fly catchers with the objective of catching the close price objective of catching the close price relatively close to one of one to four

[08:59] the day. It's not for the faint hearted. It's not your grandmother's mutual fund, meaning that you'll have more variance than possibly

[09:11] what you're accustomed to, but also the potential for larger profits. Take us through how you trade this strategy with entry and exit. Every day around between

[09:23] entry and exit. Every day around between 9:30 a.m. Central Time and 10:00 a.m. I'll do a roll call. Who's ready to fly? Are do a roll call. Who's ready to fly? Are we at ready or wait? Usually we try to

[09:35] avoid significant news events. If something's about to happen, we might wait a little longer, but it's usually around 10:00 a.m. that we put our first fly on, and we're looking to trade it a very close to at the money. What are the

[09:50] rules for your second trade? Well, the very first one determines our Well, the very first one determines our next action. So, it all depends upon, >> [snorts] >> So, we've collected anywhere from $13

[10:08] per contract to well, $27 Mhm. per contract. I believe on Friday, our first one was around $14 because

[10:21] right now we're at a very low VIX environment, a low volatility. So, we're not getting as much premium as we used to. What are the rules? In essence, anytime you collect less than $15,

[10:37] our next add will be a plus or minus seven with an add at 10. seven with an add at 10. If we've collected over $15, between 15 to $19, our next add would be plus or minus 10

[10:52] our next add would be plus or minus 10 with an add 15 apart. Four flies open, is that typical at this time of the day? Typical is anywhere from three to five

[11:05] flies, depending upon how much you collected for your first one. If you've collected over $15, the most you would have on at any one time would be four. If you've collected less than 15, the most you have on is three.

[11:20] What are the rules for getting out of them? Do you have any kind of stop loss Well, it's not typical to what most people think about stop losses, but it's essentially exiting a fly anytime it gets to 90 to

[11:37] exiting a fly anytime it gets to 90 to 100% loss at expiration. For example, if 100% loss at expiration. For example, if you sold something at 6,000 and it went to 6,000 and 10 and you collected $10 for it, you'd

[11:51] begin to cut your losses on that one. Yes, John, it's definitely not a set it and forget it and go to the supermarket type of trade. So, instead of speed, this is about positioning and adaptability. Let me

[12:07] interrupt with a quick tip if you like trading earnings. Earnings trades are some of the most exciting opportunities in the market, but they can also be in the market, but they can also be tricky to do right. Big moves, changing

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[13:00] first month. You find the discount link below or in All right. Back to the interview. Jamal Gouhari takes a completely different approach. This is a high-risk,

[13:15] high-reward butterfly strategy, which he calls the Trojan Horse. Instead of trying to win often, the goal is to create massive asymmetry

[13:28] where a small investment can turn into a very large return. The key idea is to enter later in the day, identify where the market is likely to close, and position a very narrow butterfly around

[13:41] that level. Yeah, so the strategy is essentially a zero DTE butterfly on the SPX. Uh we use the SPX because it's European settled and is European style and cash settled. So, you don't have the risk of early assignment. Uh you get

[13:55] very good liquidity, good strikes, and essentially what you do is we have a bunch of indicators which we'll cover, uh and we look to enter around midday to essentially get a little bit of a pin on the actual index and kind of scale out

[14:09] as the market moves in your favor, moves into that profit tent, and you go for a huge wins, and typically uh the wins are anywhere from 1 to 5,000%. These are huge huge wins, very hard to get the max profit and be that

[14:22] accurate, uh but we have some some methods of really accomplishing that more often than not. So, this strategy is a very high risk reward trade, but it doesn't have the highest win rate. So, essentially these butterflies, a lot of

[14:35] tickets. Uh a lot of people use these butterflies to hedge even, but what we're trying to achieve is a optimized risk reward, and again, a lot of the wins are anywhere from 1,000 to 5,000% because you use these very narrow

[14:50] 5,000% because you use these very narrow uh strike prices, and the actual time of entry will be around midday, and the win rate is only about 52%, but when your win rate is 52%, that's really all you need when your risk reward is so high.

[15:04] Right, so this day is Wednesday, March 11th. So, nine times out of 10, uh I'm sure everyone knows in here that the VWAP is a commonly used indicator. A lot of banking algorithms are actually based around the VWAP, and this VWAP is

[15:20] actually going to, nine times out of 10 coincide with the pin. So, right here on this specific day, we pinned right here at 6775. And the reason we did this is not just because oh, the VWAP is here, we're

[15:33] going to blindly pin this price. It's because one, yes, we look at the VWAP, obviously it's right here, but two, we have the bullish RSI divergence. Now, we have two checks. The next check box is we have this res

[15:46] are starting to cross over. And the last check box is that we finally have positive gamma in this area covering this nice little uh a bit of a cushion. So, this is all about precision and

[16:00] asymmetry. Next, let's look at the trader who's focused on protecting against risk. Asha Pasha angle. His focus is risk control.

[16:17] Instead of just selling premium, he builds a structure where part of the trade actually protects him if the market moves against him. butterfly combining credit spreads and a

[16:31] protective debit spread. So, basically, I've been trading the zero DT SPX credit spreads for the past 5 years. However, uh you know, when things go bad, meaning like what happened last Friday when the

[16:46] market moves strongly against you, even having a credit spread does not protect you completely, and you it can lead to large losses. So, what I came up with a strategy is to

[17:00] have a broken wing butterfly on the put side or on the call side, depending on the trend of the day, in which you have one debit spread facing which you have one debit spread facing the market, and then you have two credit

[17:15] out of the money. In that way, if the market moves against you, you have some protection. And then, the goal is to is to be able to flip the put spread into a call spread or

[17:30] or vice versa if uh the market moves against you. Uh maybe we first uh should bring up an example so that everyone is clear about what a trade like this would look like. Here you have set up an example trade in

[17:46] option strat. Please tell us what we see. Yes. So, today it is premarket. So, the market currently is trading around 6620.

[17:58] So, if if the market opened right this minute, the So, I would buy the 6600 put. And I will buy one.

[18:12] And I will buy one. And I will sell three of the 6590 puts. And I will sell three of the 6590 puts. And then, I would buy two of the 6570 puts. So, essentially, I'll have a debit

[18:24] So, essentially, I'll have a debit spread 6600-6590. That would be protecting the the two credit spreads behind it. I will start off with a credit. And I do realize

[18:41] that I'm giving up some of the credit received you know, the debit spread, which is But, I have felt that it really helps in

[18:54] protecting the strategy. And most of the time, like what happened on on last Friday, when there is a you know, drop in the market, which is precipitous,

[19:08] I was able to flip my put spreads flip my put spreads into into zero DTE call spreads out of the money. And I was able to do that by using the

[19:21] profit that I had generated from the debit spreads, which were further closer to the market. Can you be a bit more specific about how you did this flip from your put side to the call side? Yes. So, on Friday I had a 6670

[19:42] 6650 credit spread, two of them. And then I had a 6670 6680 debit spread, which was sold in the morning

[19:57] morning for a credit of, I believe, 40 cents. And in the ideal scenario I would have been able to close the whole position either for 10 cents or a 5 cents debit

[20:10] if the market had stayed out of the money. And normally that can happen about 2 hours or 2 and 1/2 hours into the trading day. That's the ideal situation. However, around I think 90 minutes into

[20:25] the market day, when the market started falling so severely, course it was still falling so severely, course it was still at 6700, but it was falling and and the at 6700, but it was falling and and the VIX was above 19 or 20 at that point.

[20:40] I was able to flip my credit spread into a 6700 6720 call credit spread. And I was able to do

[20:52] call credit spread. And I was able to do that at a credit when I also sold my 6670 debit spread, which was now worth, I believe, $2 in credit when I sold it

[21:05] believe, $2 in credit when I sold it back. In that way, it added the level of protection that I was looking for. And instead of the market slicing And instead of the market slicing through my position and me having a full

[21:18] loss or have like a stop loss of three times credit received as most people do, I was able to use the strategy to go on

[21:30] the opposite direction which proved to be, you know, the right strategy for last Friday because the market kept dropping and my call spread was not threatened and it expired for full profit. I've been doing it for

[21:44] about 3 months now and I've been averaging about 10% results a month being very conservative and using a being very conservative and using a smaller portion of my account with the

[21:58] goal of being uh you know, to go to all cash every night. So, this is a more defensive and flexible way to use butterflies. Now, let's finish with the simple repeatable income approach from Maria

[22:13] and uh Rob Hammock. This strategy became known as the Maria Shoe Trade. It started with a simple idea. Make It started with a simple idea. Make about $300 a day consistently so that

[22:26] Maria could buy her expensive shoes. And the way to do that was a simple iron And the way to do that was a simple iron fly traded during a specific time window with clear exit rules. And they would call me, "Maria, we have

[22:40] new shoes." And I was like, "Oh, this needs to make $300 a day and I would have enough money for the pair of shoes at the end of the >> It's an iron fly. She would put it on at goes on at 10:30 and comes off at 2:30

[22:54] or at 25% profit, whichever comes first. And what you do is you sell an at the money put and you sell an at the money call and then you have $20 wings, and it's going to use 7 to $800 in buying power, and she started in June of 2023,

[23:09] power, and she started in June of 2023, and it averaged about 129 $111 per day per contract. So, she did three three cuz she wanted $300 [clears throat] a day to make $1,500. Yeah, no, it doesn't make $300 every day. It's average,

[23:21] right? It's average. I just put this up in Option Strat this morning just to show how a trade like this work. An iron fly is that you are selling fly is that you are selling put and a call or at the money

[23:36] and you are doing it around 10:30 Eastern time. It gives everything a chance to calm down, and you can see exactly where the pattern starts to >> There's a lot of day traders that are in from 9:30 to 10:30, and at 10:00 in the

[23:50] United States, they do a lot of reports are issued, which will drive the market crazy. So, she she Again, you know, there was no intuition. That's why women always make better traders than men is because she

[24:03] could just look at it every day and kind of got a feel for it. We knew at that point when Powell used to speak and not to do it that day. I think most people work it that way. But nowadays, it's a little more touch and go cuz you never

[24:15] if Trump and someone is going to get online or get on eBay and say something. So, it's a little different, but for the Powell is speaking. So, your buying power is only 7 800 900 dollars. So,

[24:30] what we like about this trade for you know, not everybody has a larger account, it's something you can do and be engaged every day and not use up a lot of buying power, and it has a positive expectancy.

[24:44] It may It It may actually lose more than it wins, but because you win a lot, it you know, the positive value comes out at about $111 over time. You know, you need to trade it 30 40 50, 60 days in a row in order

[24:59] get a run of winners or losers, but since 2023, it's about $111 a day per contract. Five traders. Five different ways to trade zero DTE

[25:11] Speed, positioning, positioning, precision, protection, and consistency. Same structure, different philosophies.

[25:23] If you want to go deeper into any of these strategies, you'll find the links to the original interviews in the description. And if you enjoy this type of content, subscribe to Theta Profits.

[25:38] subscribe to Theta Profits. Thank you.