Butterfly Options Explained: Iron vs Standard vs Broken Wing

[00:02] is that I just get more bang for my buck out of it. Butterfly strategies are popular with experienced options traders, but many of us struggle to really understand them. Are they lowrisk income trades or precision tools that

[00:17] require active management? Today we break down what butterflies are, when break down what butterflies are, when they work, and how to use them properly. Welcome to Steve Guns. Hello, John. Thank you so much for having me back.

[00:32] I've uh really enjoyed doing your show from time to time. And I apologize for don't know, I had some eye surgery a while back and it's been too long, but bothering me. So, I still wear these when I'm at my screens. Well, they make

[00:46] you one of the coolest guests we have. [laughter] [laughter] >> Thank you. So, let's get straight to it. What is a butterfly trade and why should we consider using them?

[01:00] Well, a butterfly trade is traditionally two credit spreads put together. It can look at here in a few minutes, but it's predominantly two credit spreads. It's going to be a put credit spread and a call credit spread and they have the

[01:15] same center strikes that gives some really unique benefits to this particular trade. So, uh, it's something that I have taught for many, many years and, um, I find it to be a really good go-to trade for a lot of reasons that

[01:29] we'll be covering here tonight. Yes, we will indeed break down in detail the different types of butterflies and how to use them, etc. But tell us first

[01:41] a little bit about yourself, Steve. Sure. So, I've been an active trader for over 30 years. At different times in my career, I've traded full-time. Uh, at other times, I've had other businesses um, and just traded part-time. For the

[01:57] past probably seven, eight years, I've been a trading coach. About 15 years kind of came in for me. About 15 years ago, I had a coach that looked at what I was doing as I was struggling to be consistently profitable. And the guy

[02:12] told me, "Steve, you're all over the board. You have immense amounts of technical knowledge on options trading, but you're trading condors. You're trading butterflies. You're trading calendars. You're trading diagonals. You

[02:25] don't know how to manage any one of those all the way through. He gave me a task. He said, "I want you to pick one trade, and I want you to only trade that one trade for six months until you know it inside and out." I asked him for a

[02:37] recommendation. He recommended the butterfly to me. So that launched me down my path of learning the butterfly inside and out. Let's start with the inside and out. Let's start with the basics. What exactly is a butterfly

[02:52] trade and how do they profit? So again, there's a lots of different ways that a butterfly trade can be configured or set up depending on the market conditions. That's one of the great things that I really like about it. Maybe the best way

[03:06] is for me to just go to option strat, which John and I both use here, and give you some diagrams, kind of give you a better sense of it, and I'll help you scenarios and potential uses for a butterfly using the platform. First

[03:20] thing I want you to see here is I have put two different trades side by side. I have the iron condor on this side and the iron butterfly on this side. Now, in a minute, but right now, what I

[03:34] really want you to see here is that an iron condor is made up of a put credit spread and a call credit spread. And it gives us this basic configuration here. gives us this basic configuration here. And lo and behold, the butterfly is the

[03:49] And lo and behold, the butterfly is the exact same configuration made up of a put credit spread and a call credit spread. The only difference is that the short strikes are at the exact same location. So if I come and I move these

[04:03] location. So if I come and I move these in to the same spot, let's see, we're at 687 there. So I move both of these into 687. 687. That basically is an iron butterfly. So

[04:16] it's if you traded condors before, you're going to have the general gist of you're going to have the general gist of what an iron butterfly is. Now, how does a butterfly make its money? Well, it makes its money much in the same way

[04:29] that a condor makes its money. And that is basically we are selling in this case, we are selling these two short strikes. Now, what makes a butterfly

[04:42] traditionally a little more uh a little better from a risk-to-reward standpoint is that we're selling strikes that are at the money. So, we're going to get a higher level of premium for those. And let me just split this back out into a

[04:57] condor. And I'll I'll show you exactly what I mean by that. So, here we are back out in our condor configuration. We can see here that the max loss in this trade is $102. Max loss over here is

[05:11] 108. So, they're very similar. But look here. My max profit and the credit I'm taking in is 597. Over here, my max pro profit is $8.91 and I'm taking in $891.

[05:25] profit is $8.91 and I'm taking in $891. So, the reward to risk, I'm risking the same amount of money. My potential reward is much higher. Now, I want to be very clear. I am not personally ever trading these to try to pin that number

[05:40] at expiration. I don't trade either of these anywhere near expiration personally. But that risk-to-reward ratio is something that I do use in my valuation when I'm looking at these trades. And for that reason being one of

[05:55] the main reasons, that's one of the reasons I like the butterfly is that I just get more bang for my buck out of it. But we do have different types of uh butterflies too. You mentioned now what is called the iron butterfly, but we

[06:09] we? >> We absolutely do. So, a butterfly can be >> We absolutely do. So, 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

[06:23] and the call credit spread. But the 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 allp put butterfly. Now, you're going to see it has very, very similar dynamics. It's

[06:37] 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 allp put butterfly. Now, the difference here is in this particular trade, I am paying for this to enter it,

[06:54] where on the other, the iron butterfly, I'm taking in a credit. Now, at the end of the day, people really often get confused about this. They're thinking, well, wait, I'm I'm paying to get into this one, and the other one I can get

[07:07] into for credit. I want to get into the one I can get into for a credit. It really doesn't make any difference in the one I get into for a credit. What I'm waiting to have happen is I'm waiting for the price of those center

[07:21] strikes to drop in value so that I can buy it back cheaper. What happens in buy it back cheaper. What happens in this long put butterfly? It makes profit the same way. and it's making profit from these two these two center strikes

[07:36] from these two these two center strikes here uh decaying and that profit comes in the exact same way over time. If I slide my time slider here, profitability happens exactly the same way. It's just in this case paid a certain amount of

[07:49] debit to get into this. When I exit this trade, I'll be selling that for a higher amount. So, they both profit in essentially the exact same way. And for all practical purposes, whether you do a long put butterfly, a long call

[08:05] butterfly, or an iron butterfly, the results will often be very, very similar. Many times you'll see a slight difference in your cost to entry or your max profit. That usually has to do with bid ask spreads. And in this case, the

[08:21] bid ask spreads might be a little bit wider, but for all practical purposes, they're all essentially the same trade. So that means it doesn't really matter if I set it up as a pure coal butterfly or a pure put butterfly or an iron

[08:36] It it really does not matter from a standpoint of the P&L diagram. And what I often urge people to do is to go in and take a look at that. I could just as easily convert this to a call butterfly

[08:48] and it would look almost exactly the same way. So, uh, again, I urge people to model up the couple variations, compare the two, see if there's any significant difference. 90% of the time, you're going to see virtually no

[09:03] difference in what those P&L diagrams look like. So, it's just really about what you're comfortable with. For me, I started learning to trade the iron butterfly because I already had some familiarity with the condor concept and

[09:17] it just came a little more natural to me. But over time, I evolved into trading the long put butterfly is mainly the main one I go to. So this one here is a long call butterfly as I'd mentioned and then I think this one was

[09:32] the long put butterfly uh here. And again they're they're all essentially exactly the same. So let's uh leave option strut for a moment and um address the question what are the main reasons for using butterflies for trader?

[09:49] Well, the main reasons I I can actually illustrate them a little bit better here on Option Strat. To me, the main reasons that I consider this to be so important or such a great trade is first of all, theta decay. These things have a massive

[10:04] amount of theta associated with them. And we can see here that our T0 line is really wide during the course of the trade. So, while this trade shows a 23%

[10:17] personally don't place a lot of weight in that number because that number is your percent chance of profit if you never adjusted this trade and you let it go all the way to expiration. Now, I know how to adjust trades. So, if this

[10:32] market shifts one direction or another, I will adjust that trade and I've got a much much higher percent chance of profit because I know how to adjust it. But the other thing that option strat isn't taking into account is that if we

[10:44] come all the way out to expiration here, uh yeah, my break evens are right there uh yeah, my break evens are right there and it's a relatively narrow range, but you'll see that if I backed up and I came to a little bit before expiration

[11:00] time in here, look how wide my break evens are here. So what I do on these evens are here. So what I do on these trades is I get into the trade. I try to let that trade play out for a number of days and then I look to get out of it

[11:15] for about 10 to 12% profit. Shut it down and move on to the next one. And I don't by the way, John. And that's going to be the next thing uh that I wanted to talk the next thing uh that I wanted to talk about was it has a very wide flat T0

[11:31] line. So the T0 line is of course that line that goes from green to red. And right now we can see it's a little bit negative delta. Well, one of the most common ways that I trade personally a butterfly is I do what's called a broken

[11:45] wing butterfly. Well, so what is a broken wing butterfly? Well, in our current markets where we're often going higher uh at least, you know, in recent um months and years, I will do something

[12:00] like this. where I set up this trade in a way that it has little to no risk to the upside. >> What exactly did you do now? >> What I did was I did what's called breaking a wing. So this these were

[12:15] originally equal distance. Thanks for calling that out. I should have been a little clearer on that. So these had been equal distant apart and we can see right here my butterfly is essentially flat. I have the same amount of risk on

[12:28] both ends. And we can also see here that my T0 line is slightly negative delta. my T0 line is slightly negative delta. So what I did first of all a way that I make this trade is and I shifted this the wrong direction. So let me come back

[12:42] and reshift it is that I set this up so that is that I set this up so that the upper side of the butterfly is very

[12:54] the upper side of the butterfly is very close to the upper break even. Now, I'm still equal distant here, you'll notice. So, what I'll do is I'll come in and I will break a wing. So, I'll lower this side, giving this a wider spread.

[13:11] By giving that wider spread, what I've done, I've taken on a little more risk here to the downside. So, I I accepted that. I've accepted the fact that okay, I'm now going to have a bit more risk down on that lower end, but I've

[13:24] down on that lower end, but I've flattened my T0 line significantly here on the upside. I no longer have a lot of negative delta in this trade, and that helps me out quite a bit. Now, as I go to uh particularly in a market like

[13:39] we're in right now, I'm going to break this swing just a little bit further. Now, I want you to notice the percent chance of profit right here. Right now it's 25%. If I break this wing just a little bit further to where I have no

[13:53] risk of loss on the upside, my percent chance of profit goes to 75%. Now, why did it go to 75%? Well, it went to 75% because now no matter how high

[14:06] the market goes, I won't lose money. I might not make a lot of money out here if if I let this go all the way to expiration without adjusting it. But again, one of the keys is knowing how to adjust butterflies as things progress.

[14:19] adjust butterflies as things progress. But right now, look how flat this T0 line is. So in other words, if I put this trade on, this market can go down. And again, we're in SPY here. So this market can go from 688

[14:33] all the way down to 664 and it's barely impacted this trade. Likewise, it can go up however much I want it to go up. Doesn't make any difference. and I won't lose on this trade. So I have one question because we

[14:47] have we have touched on theta uh we have touched on delta but how does the touched on delta but how does the butterfly work with volatility and vega the option Greek vega so if we look at all of the Greeks here

[15:02] we can see that you know it's right now the way this one is structured it's fairly flat delta it doesn't have a massive amount of theta to it as most people know theta grows it increases over time so as we get closer to

[15:15] expiration that theta is going to speed up. It's negative Vega. So, what that does mean is if we do get that selloff, and that's why I saved this trade. If we do get that selloff here, what's going to happen is volatility is going to go

[15:30] to happen is volatility is going to go up. Now, when volatility goes up, that's not really good for a butterfly. So now it's not horrible because again we can see that this T0 line stays very flat for a very long period of time, but it's

[15:45] it's not great. It's going to overall move this line down a little bit because of that volatility spike. Now the reason that's happening, by the way, is these that's happening, by the way, is these short strikes that we sold are becoming

[16:00] more valuable. those those puts that we sold there. As the market is selling off, people are clamoring for those puts. They want to buy that insurance. when they go to buy that, it drives the price up. We want that to decay out of

[16:14] price up. We want that to decay out of there. So, an increase in volatility isn't really a good thing for the butterfly. Now, on the flip side though, if I go and I put this butterfly on in a higher volatility environment, which is

[16:30] usually when I personally choose to use a butterfly, when when those short strikes are at a premium because people are clamoring to buy them, I will sell. are clamoring to buy them, I will sell. And then as the market uh excuse me, as

[16:45] And then as the market uh excuse me, as volatility drops off, profitability comes into this trade. And a bit later in this interview we will touch on your strategy flyagonal which we also has a separate have a separate interview about

[16:59] here on theta profits where you actually use this broken wing butterfly and use this broken wing butterfly and benefit from the lower uh lower volatility but we will get back to that a bit later. I would like to get into

[17:13] how you enter the butterflies. What are the important considerations when you enter a butterfly? >> Certainly. So, let me say, John, there's butterflies, just like there's lots of different ways to trade iron condors or

[17:28] pretty much any options trade, but it depends on whether you're trading very shortterm. Some people will trade what's called zero DTE, where they just put the trade on uh they put on a butterfly trade at the open of the market in the

[17:40] morning, and they're day trading it throughout the day, waiting for that decay to happen. very very quickly. That is not my methodology. I was a day trader for years. I got away from it. I don't like setting it at screens, but

[17:52] that is a perfectly good path that people can do. What I, in fact, I think you had um a couple from Florida not too long ago on here that did exactly that, and they use some AI tools to do it. It was a really good interview. But what I

[18:06] choose to do is I tend to put my butterflies on out further anywhere from butterflies on out further anywhere from 30, 45, 50 days, etc. And the reason I do that is the butterfly, first of all, it's a defined risk trade. I know when I

[18:22] enter this trade exactly what my risk is going to be. And it also moves slowly. And I know from that very flat T0 line that the butterfly has that if the market goes up 50 points down 50 points in a day and I'm talking S&P by the way

[18:39] even [clears throat] have to look at my P&L diagram. I know that there's been nothing that's really been impacted on that trade. I am just waiting for time that trade. I am just waiting for time to pass. So, for me, I chose to do those

[18:53] to pass. So, for me, I chose to do those in a 45day window, 30-day window, even in a 45day window, 30-day window, even up to 60-day windows in some cases, and at managing them. If I didn't look at them for a week, didn't make a

[19:06] difference. So, for someone working or someone that doesn't have the time to it's a really good trade for that. I'm just waiting for time to decay and for that T0 line to start lifting up. Now, about entry. So, that's the days to

[19:21] expiration side. Let's talk about the volatility side of the equation. And I alluded to this a little bit earlier, but what I really want to have happen is I want those center short strikes to be higher in value when I go to sell them.

[19:37] So, I'm waiting for volatility to spike up a little bit. When something causes volatility to spike up, when the market tends to fall a little bit, I will put on one of those broken wing butterflies. And again, I have the upside break even

[19:51] that that upper side right about where the market is. What that does is that the market is. What that does is that gives me almost 100 points of buffer to the downside and it gives me no risk to the upside.

[20:04] So that's what I consider to be um a perfect butterfly when I can get that entry and I will usually only get that entry when volatility is higher. Will you always place the shorts on at the money or will that depend on where you

[20:20] >> So, let's talk about the entry on the butterfly and I'm going to talk about entry specifically on butterflies that are further out in expiration. I'm not going to deal with those zero DTE type butterflies. So, my favorite trade on

[20:34] the butterfly because it is largely handsoff. I don't have to pay close attention to it is a configuration I'll show on the screen now. Sean, if you want to pop up option strat there for us. This is the risk profile that I tend

[20:50] to like to trade. Now, this happens to be in spy and I will usually have somewhere in the neighborhood of in this case, let's see, 678. Looks like I got 10 points here and then I'll usually go further to the downside. So, in this

[21:05] case, looks like I've got 15 points uh to the downside. And that gives me this this broken wing look that we're seeing there. Okay, where I have more risk on the downside than I have on the upside. And notice that I put my upper long in

[21:21] And notice that I put my upper long in this this 688 is up there right about where the money is. Now, the reason that I do that is that I now have about 100 I do that is that I now have about 100 to 110 points of downside that the

[21:35] market can move. And I still haven't gone out the bottom of that tent. And particularly for people that might, you know, work during the day or not be able to check the market every day, etc., is basically that if the the market just

[21:52] shifts back and forth, in the case of SPY, five points, maybe 10 points during the course of a day, I don't even need to look at this chart. I know what it's going to look like. All I'm doing here is I'm just simply waiting for time to

[22:06] pass and for this T0 line to start mounding up a little bit to where I can mounding up a little bit to where I can get my 10% or so of profit and move on to the next one. But it's important when I go to put these on, I can get a better

[22:21] trade on when volatility is higher. So when volatility is a little bit higher and the short strikes are at a premium, that's when I want to do this trade more times, but I don't get as good a riskreward ratio and I don't usually get

[22:37] a setup where I have no upside risk to it. That's what I'm looking for when I go to put these on. Uh you mentioned that you mostly do these trades on S&P which is an index option and a so-called European style option that is cash

[22:53] settled but we also have most options are American style like SPY which where you can be assigned uh shares. What are the considerations between these two types? Uh what is the assignment risk for instance with these

[23:08] uh butterfly trades? For me, I would say there's very little to no assignment risk, largely because I am out of them long before expiration. If I carry them close to expiration, I would have assignment risk. But again, I I just

[23:23] expiration. I usually carry them about 2/3 through at the most. So, I would say that while you always need to be cognizant of potential assignment, I

[23:36] can't say that I've ever had it happen to me when I'm getting out of these way to me when I'm getting out of these way before they expire. Uh, that spy in SPX, there is no assignment. That's one of the things I like about SPX that and in

[23:49] the United States, it has certain tax ramifications that are better. your gains when you're trading S&P aren't taxed at the same level as your gains in SPY are. So those are the reasons that I usually lean toward SPX, but it is a

[24:03] bigger product. It's 10 times the amount that SPY is. So in this particular trade that we were discussing, I had about $200 in risk. If I did that same trade risk. >> We have touched on it, but let's move to

[24:18] when you exit the uh the trades. You said that you do not aim to hit into the profit tent. So, what are your main rules for when you exit the trades and why? Yeah, great question, John. So, let me go ahead and illustrate that for you

[24:33] in Option Strat as well. I think it'll just be easier to see there. So, if we take a look here at Option Strat, again, this is constructed in the way I talked about where my upper here is right about the money. We're trading at 68745.

[24:48] My upper's at 688. And then again, I've got this broken wing configuration where all of my risk I've chose to position my risk down below 668 in this particular

[25:00] case. Now, the reason I do this again, look how flat that T0 line is. That T0 line, I can go up as high as the market wants to go and I'm not going to lose money. And I can come all the way down to, you know, 6 is that 666? Again, my

[25:16] eyes are a little buggy here. 668 uh before I go out the bottom side of this before I go out the bottom side of this tent. So I have a massively wide range. If we look at the percent uh chance of profitability again, 75% chance of

[25:31] profitability there. Now to answer your question about when do I exit? So I get into this trade and it's going to look about like this. Over a period of time, we can see that that line starts to mound up. My T0 line starts to mound up.

[25:46] mound up. My T0 line starts to mound up. So again, I can be anywhere between uh So again, I can be anywhere between uh 666 down here and all the way up to a th00and in spy and I will still be

[25:58] profitable. So somewhere along the way in here, if we just chop back and forth in this general range, uh in this case, I've gone out about 18 days out of my 24 days to expiration, and I would be hitting a decent profit target in that

[26:14] range. I'm usually looking to get about 10% of the amount that I'm risking. I 10% of the amount that I'm risking. I might bump that to 15% or 20% if I get a really good entry. Again, a really good entry is I got into it when volatility

[26:29] spiked in the market and I was able to get into that trade for less risk, higher reward amount, I might try to milk that a little bit longer and get more like 15 or 20% out of it. But again, the nice thing is really flat T0

[26:45] on a daily basis, particularly if I'm putting on that trade, you know, 20, 30, 40 days out in time. >> And would the same be if you are trading >> First of all, if I were to trade a balanced butterfly, the first thing I

[27:00] would do is I would probably be a little bit more centered here uh in under the market. So I would probably be you know more along these lines more along these lines but I also need to notice that I am

[27:15] negative delta in this case. So if the market now the market can't float up without me taking heat or taking pressure or showing losses if you will in this case my wide range of profitability is way down here below the

[27:32] 10. So, if we are pushing on all-time highs in the market, and I have an assumption that our market's going to back up, that's when I would be more likely to do something like this. I'd have to watch this trade. This wouldn't

[27:47] be a trade I'd put on and then not check in on it for a week. And that brings us in on it for a week. And that brings us to management. what when the trades go against you, what are your options for how to manage these trades and what to

[28:01] what extent do you do it? So the the simplest answer is that you I I simplest answer is that you I I basically roll one of the legs or some of the legs. So let me come back here. One of these I had saved. Let me go to a

[28:15] save trade here. So this is a a butterfly that I had saved. So, if our market started coming down into here somewhere, there's a couple things I can do. Really, what I'm looking to do is I'm looking to flatten my deltas in most

[28:29] cases. So, if the market came all the way down here, a couple ways I could flatten my deltas. I could bring one of these up a little bit. I could tighten up my risk to that downside by rolling these puts higher. I'm going to spend

[28:43] money to do that. I have to know that. But you can see if I'm still anticipating more downside, that's going to work in my favor at that point. Then the other possibility, let me go ahead and just reset where I was there.

[28:58] The other possibility is if we start moving to the downside and I need to flatten my deltas, I can shift my center strikes one direction or another. Again, just all I'm doing here is just doing a vertical roll. And I can do one of

[29:13] these. I can do both of these. I could also potentially move these. All I'd actually be moving these up, but all of these are just a vertical roll where I, in this case, am selling my 689 and buying a 692 or whatever the case might

[29:30] be. So, that's the other nice thing I like about butterflies is they're pretty like about butterflies is they're pretty easy to manage just with a simple vertical roll one direction or the other. Steve, what are the biggest

[29:42] mistake that you see options traders do with butterflies? You know, the with butterflies? You know, the butterfly is a largely foolproof trade. I think maybe the biggest mistake that I see, and I say foolproof proof trade,

[29:56] there's no foolproof trade, but the butterfly requires less knowledge and skill than most trades because if you put it on further out in time, it moves so relatively slow. If there is um the biggest thing that I've run across in

[30:12] teaching this is that people will put it on at the wrong time. If you really want to do this trade justice, you need to kind of wait until you get that spike in volatility till you can get a good price. And that brings me to another

[30:27] point. I always teach my students to find a configuration you like. For me, it's a 5060 configuration. So, I've got a 50 point spread on the upside, 60 on the downside. And I always trade that same configuration. Is that because it's

[30:41] a magical configuration? No, it's not. But what I get from that, and this is what my instructor 15 years ago told me to do by trading the exact same configuration all the time, I learn what that pricing is like. I learn that if

[30:55] I'm getting this price for that trade, that's a good price. I need to get into that one. Or if it's too high of a price, I know to just take a pass on it. So the the mistake that I see people most often doing is not taking into

[31:10] account when they should get into these because this isn't just a universal trade that you should just put on all the time. You need to be cognizant of volatility. >> And that brings us to risk. What is the

[31:22] worst that can happen with butterflies and for for the trader? configuration of the butterfly. If you did like what I did right here, this particular well, the one that we last showed, that broken wing butterfly where

[31:37] I have no risk to the upside, the biggest risk in that situation is a massive move down in our markets that more than um 110 points in S&P or more

[31:50] than 11 points in SPY. That's going to put you out the bottom side of the butterfly. that's going to dramatically increase volatility, which is going to work a little bit against you. But even at that, if you have a $400 or $500 max

[32:06] risk in your trade, if you're early in the trade, if you're not near expiration the trade, if you're not near expiration yet, even then, rather than experiencing yet, even then, rather than experiencing that $400 uh loss, it might be a $150

[32:20] loss or something like that earlier in the trade. So I I one of the reasons I like this it's a good way to learn and it doesn't have massive risk associated

[32:32] with it on either side. It's a defined risk trade and you can define that risk to be whatever you want it to be. And you know I always ask my guests to put their strategies on a risk profile scale from one being very low risk and 10

[32:46] being very high risk. And as we know there are many ways to tra trade butterflies. So I guess it may not be easy to just give one answer, but could you kind of indicate where the different types of butterflies would be on a scale

[32:59] like that if you and you're free to define the numbers as you see fit. Yes. I mean overall I would say the butterfly is certainly regardless of how you configure it, it's going to be less than a five on the risk scale. When you

[33:15] configure it like what I last showed, that broken wing butterfly with no risk to the upside, I would put that down around a two or a three. I mean, what percent chance is there that we're going to have a 2% pullback in SPY? Of course,

[33:30] happen, but it doesn't happen very often. So, and when it does happen, if you learn how to properly manage these and adjust these, it's kind of a, you know, you work your way through it. Does

[33:43] that mean I never have a losing butterfly trade? Of course not. But once you learn the management techniques, when those things do happen and you understand proper management techniques, you can reduce the loss in them or many

[33:57] times even bring them back to some level of profitability. So to answer your question, John, I would say I would put all butterflies at probably four or lower. I would put this broken wing butterfly where the upper longs are at

[34:11] the money. uh that 6050 split that I showed, I'd put that probably around a two. >> Steve, as as we mentioned earlier, you >> Steve, as as we mentioned earlier, you use broken ring butterfly in your flyal

[34:24] strategy and we do have a separate interview video about the flyagonal strategy that I recommend people to watch. But tell us a little bit about how broken uh wing butterfly plays a role in this strategy. maybe first

[34:40] mention exactly what the strategy is. >> Certainly. So the flagagonal is a strategy that I started working on back in 2024. After I mastered the butterfly, I had the ability then to fully understand it, start to look at what can

[34:55] understand it, start to look at what can I do to increase its profitability, if I do to increase its profitability, if you will. So, uh, in late 24, early 25, I worked with some AI models, things like that to help me find ways to

[35:10] supplement that broken wing butterfly. And one of the things I noticed, so broken wing butterflies, as I've already explained, they're good to enter in high volatility. Now, what trade do we all know that's considerably good to enter

[35:24] in low volatility? It's a positive Vega trade. Well, that's a calendar or a diagonal. So those trades are kind of opposing trades to each other. So I got to thinking, is there a way to combine those into something that um might have

[35:41] some superpowers? And in fact, I did find a way of doing that. And so far, I feel it does have superpowers. I've been trading it live for a little under a trading it live for a little under a year now. And it's got a 93% win rate

[35:54] year now. And it's got a 93% win rate and well over a 100% return on the last 6 months. and over 200% annualized. So again, John, I'll kind of give just a little hint on that that people can see

[36:07] uh to better understand that concept. So what I what I wanted to show specifically here, this is a call broken wing butterfly. And again uh as time progresses, profitability creeps into this call

[36:20] also notice this is where our current market is. So this is set up the opposite of the other one I talked about. The other one had a broken wing to the upside, meaning that it had unlimited risk to the upside. This one

[36:34] is structured exactly the reverse of that and the it's here is where those long the lower longs are is right at the money. So this is the broken wing

[36:48] butterfly. We can see as volatility drops that gets profitability and as time goes by that gets profitability. But I now have this downside risk here. How can I mitigate that downside risk? What trade, as I

[37:05] already mentioned, do we know that tends to benefit if volatility goes up? So, I'm going to scale back my time here to today. Now, I'm going to bring in a put

[37:17] diagonal. So, we're just going to include this. And there's specific ways as to how this is all set up to to get the the most opportune um environment. But the thing I want you to notice is my break evens

[37:33] uh had been somewhere, you know, all the way up here to the upper end. That didn't really change much, but the lower end had been about right in this range when it was only the butterfly. Now, by adding that diagonal, I've added a whole

[37:48] bunch more width to this tent. Not only have I added more width to this tent, I've dramatically increased the theta decay because now I have two separate structures that overlap here in the center. And that's what I call the theta

[38:03] bomb. That that center where those two uh are both decaying. Two types of trades are both decaying in the center there at the same time dramatically increases the theta. Now, let's also take a look if volatility goes up. Well,

[38:17] what trade benefits when volatility goes up? Look what's happening as to how that up? Look what's happening as to how that side, the diagonal side, widens out considerably. We also can advance this to a few days into the trade. Let me

[38:34] just take volatility back to where it was. Now, I'll start to spike that volatility. Now, it will not always do this. I want Now, it will not always do this. I want to be clear that calendars diagonals

[38:47] they model positive theta. Many times this will in fact occur. Sometimes it occurs more than others. There is no real consistent way to model this because we're dealing with things that expire at two separate times. This one

[39:02] expires on the 9th in this case and this one expires on the 6th. And you never know exactly how those two are going to play in real time. We can only put play in real time. We can only put mathematical models together. So that's

[39:15] mathematical models together. So that's the real benefit to this trade is and this why I can put this trade on in any market. The butterfly I always had to wait for that higher volatility. This trade I can put on anytime. I don't care

[39:28] what the volatility is. And the reason I can do that is because if volatility goes up, if our market falls, volatility goes up. Well, that side of the trade is goes up. Well, that side of the trade is going to have profitability or a

[39:43] positive outcome. The flip side of that is if volatility drops, well, where does volatility drops when our market goes up? Where does the profitability come in

[39:55] if volatility drops? So, for those reasons, this trade has So, for those reasons, this trade has been extremely solid and strong. again, been extremely solid and strong. again, 93% win rate and um I've got all sorts

[40:08] of students that have been raving about it. Um whole big long list of it. Um whole big long list of testimonials and as I said we do have a separate interview on the flyagonal strategy and also about Simon Black's

[40:23] timefly strategy that is has some of the same elements that you can watch if you're interested in going more into depth about that. Steve, let's sum up. Who is Trading Butterflies best suited for? And what would you say are the two

[40:39] or three most important takeaways you want our audience to remember from this interview? If you're looking for an incomestyle trade where you can't necessarily check into your computer on a daily basis or every other day basis,

[40:55] a daily basis or every other day basis, a longerterm butterfly, 30, 45, 60 days is a really good trade. And it's a really good trade that you can start to learn at any time. Again, I can model up that butterfly trade to where it only

[41:10] that butterfly trade to where it only has $50 in risk to the downside or $100 in risk to the downside. I can model that out however I want. And it's a great trade to learn on. You can go in and play with adjustments, learn

[41:23] adjustments, and you really can't break anything if you just keep all of those general strikes of the butterfly in place. The biggest caveat I would make on that is you're going to get the best bang for your buck on the butterfly.

[41:37] You're going to get your best entries if you wait and enter them in a volatile market. So, the best entry from my perspective is you have a chart uh the market starts tanking down and you pull back to what might be a support zone,

[41:52] but you're not sure. So, that's when I put on that broken wing butterfly with put on that broken wing butterfly with the broken wing to the upside. And so those upper longs are right at the market at that time. And when I do that,

[42:04] I've got 110 points to the downside that if I'm wrong and that's not true support and the market goes lower, okay, it's not really going to impact me too much. If the market stops there and starts working its way back higher and I've got

[42:18] guaranteed profitability to the upside, in other words, no risk to the upside because I put this trade on, right? Perfect scenario for me. Then I just wait for time to pass. I wait for that line to creep up and then I'll pull it

[42:31] off. What would be good resources to learn more about trading butterflies? You know, there are so many resources out there and the butterfly is a fairly common trade. Tasty Works, of course, always has a massive amount of content

[42:46] on on butterflies. Um, my former employer that I used to work with, Kirk at Option Alpha, has a whole series of stuff on butterflies. It's all free. The the thing about butterflies though is it's great to learn how to put them on.

[43:01] You really need to start to uh to find something that walks you through adjusting them because if you want to squeeze the most out of them if that trade starts going higher and while you have no risk to the upside, there are

[43:14] ways that you can get higher levels of profitability to the upside. So, you mean, I have a class, too. My goal isn't to be able to sell my class here, but I got a 10-hour class that spends hours on adjustments. So, the key is learn the

[43:30] butterfly, but then also make sure you find a source that helps you understand how to do those vertical adjustments up and down. We have a number of interviews here on Theta Profits that are about different ways of trading uh

[43:46] butterflies, both zero DTE and longer terms. We already mentioned Steve's Flyagonal. I will link all of those interviews up in the article on Theta Profits that are that is uh connected to this video if you want to watch some of

[44:02] the other interviews about related topics. Steve, thank you very much for joining and for sharing your knowledge about trading with butterflies. Thank you, John. Really appreciate it and uh happy to be here again.