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**Contents:**

follow link You should wisely leverage your positions through call options.

In option trading, call option is an option contract that gives an investor buyer the right, but not obligation, to purchase a stock at a specified price within specified time. It will be a great strategy to gain huge returns from little investments. However, if your predictions go in the wrong direction then you may have to lose partial or even entire invested amount.

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This site uses Akismet to reduce spam. Learn how your comment data is processed. Options are wonderful derivatives that provide enough leverage for trading. Investors can gain larger profits with smaller risk.

Image Source Option Trading Secrets: At GetUpWise, we are a team of professional writers from different areas of subjects. Once research is done, we try our best efforts to provide informative piece of articles in an easy to understand manner.

Figure 2 displays the risk curves for an out-of-the-money butterfly spread using call options. Both of the standard butterfly trades shown in Figures 1 and 2 enjoy a relatively low and fixed-dollar risk, a wide range of profit potential and the possibility of a high rate of return. The modified butterfly spread is different from the basic butterfly spread in several important ways:. Figure 3 displays the risk curves for a modified butterfly spread.

A good rule of thumb is to enter a modified butterfly four to six weeks prior to option expiration. As such, each of the options in this example has 42 days or six weeks left until expiration. Note the unique construction of this trade. One at-the-money put strike price is purchased, three puts are sold at a strike price that is five points lower strike price and two more puts are bought at a strike price 20 points lower strike price.

Unfortunately, there is no optimum formula for weaving these three key criteria together, so some interpretation on the part of the trader is invariably involved. Some may prefer a higher potential rate of return while others may place more emphasis on the probability of profit.

This also represents the amount of capital that a trader would need to put up to enter the trade. In option trading, call option is an option contract that gives an investor buyer the right, but not obligation, to purchase a stock at a specified price within specified time. Alert traders who know what to look for and who are willing and able to act to adjust a trade or cut a loss if the need arises, may be able to find many high probability modified butterfly possibilities. When using puts, a trader buys one put at a particular strike price, sells two puts at a lower strike price and buys one more put at an even lower strike price. This means that if a trader is using calls, he will buy one call at a particular strike price , sell two calls with a higher strike price and buy one more call with an even higher strike price. Before looking at the modified version of the butterfly spread, let's do a quick review of the basic butterfly spread. Buying one strike price put Selling three strike price puts Buying two strike price puts Figure 3:

Also, different traders have different levels of risk tolerance. Likewise, traders with larger accounts are better able to accept trades with a higher maximum potential loss than traders with smaller accounts.

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Each potential trade will have its own unique set of reward-to-risk criteria. In this case the trader must decide whether he or she puts more emphasis on the potential return or the likelihood of profit. Options offer traders a great deal of flexibility to craft a position with unique reward-to-risk characteristics.

The modified butterfly spread fits into this realm. Alert traders who know what to look for and who are willing and able to act to adjust a trade or cut a loss if the need arises, may be able to find many high probability modified butterfly possibilities. The Basic Butterfly Spread Before looking at the modified version of the butterfly spread, let's do a quick review of the basic butterfly spread.

Risk curves for an at-the-money, or neutral, butterfly spread Source: Optionetics Platinum Figure 2: Risk curves for an out-of-the-money butterfly spread Source: Optionetics Platinum Both of the standard butterfly trades shown in Figures 1 and 2 enjoy a relatively low and fixed-dollar risk, a wide range of profit potential and the possibility of a high rate of return.

The Modified Butterfly The modified butterfly spread is different from the basic butterfly spread in several important ways: Puts are traded to create a bullish trade and calls are traded to create a bearish trade.

The options are not traded in 1: Unlike a basic butterfly that has two breakeven prices and a range of profit potential, the modified butterfly has only one breakeven price, which is typically out-of-the-money. This creates a cushion for the trader.

One negative associated with the modified butterfly versus the standard butterfly: