Karson Keith’s Options Insight:
Dynamics Behind the Butterfly

Most option traders are familiar with what a butterfly position is, but few traders know how to take advantage of the dynamics behind the position. In fact, most traders are not even aware that you can take the other side of the butterfly. The typical position is a long butterfly, when you buy the outside legs and sell the middle. The long butterfly benefits from time decay and can be a great trade as long as it is done in the correct time frame and with the right stocks. The short butterfly is a less common trade. You simply sell the outside legs and buy the middle. This position benefits from a stock making a move in either direction.

Let’s take a $5 spacing butterfly on something like AMZN or NFLX.

One of the most important factors of trading butterflies is how far away you are from expiration. The short butterfly with $5 spacing makes almost no money in the longer time frames unless the stock makes an extreme move. On the other side the long butterfly with $5 spacing has almost no time decay in the longer time frames. In other words, doing a butterfly in longer time frames is almost pointless with $5 spacing.

Timing is everything…

With $5 spacing you need to know where (or when) the sweet spot is to enter either a long or short butterfly. In the case of AMZN and NFLX, the sweet spot for the long butterfly tends to be about when the new weekly option comes out on Thursday. This puts us eight days away from expiration. The idea is to hold the long butterfly over the weekend and melt away some time decay. Even if the stock makes a $5 move you can usually take the trade off the table at about break even, or in many cases with a small profit. If the stock doesn’t move much over the weekend, then we can simply hold the position for another day to melt away more time decay.

I will usually take part of my position off of the table regardless when it gets to Wednesday. This is usually the tipping point for how sensitive the butterfly is to movement in the stock, which is why I will take some of my profits off the table. On Thursdays and Fridays butterflies are at their most sensitive to movement in the stock, so I’ll be much quicker to take long butterfly profits off the table those days because I don’t want the market to make a swing and wipe out all of my profits for the week.

On the other side of the butterfly (the short butterfly), I favor reserving this position for the last two days before expiration, with at least $5 spacing. AAPL has been an easy winner for this position almost every single week for the last few months. The drawback is you have to deal with rapid time decay with a stock like AAPL, so I am quick to take the trade off the table if things are not moving as expected.

A more in-depth discussion is that of volatility. Timing volatility spikes and dips can improve results, but it can be tricky. A great entry for a long butterfly is when volatility has spiked, as the position will benefit from a drop in volatility. On the other side of the coin, a great entry for a short butterfly is when volatility has dipped lower. This position will benefit greatly from a move in the stock coupled with a spike in volatility.

You can also tweak the sensitivity of the butterfly based on how far apart your spacing is between the strikes. The further the spacing the more time decay and the more sensitive the position will be to movement.

Obviously, butterflies can be very complex and have many moving parts involved, but I hope this article helps you gain a better grasp on how they work.

Karson Keith


Karson Keith’s interest in trading started at a very young age. By age 13, he began trading and managing his father’s money. Today, his passion for trading has attracted a following of like-minded income traders seeking his help in taking their trading to the next level.

Karson specializes in cutting-edge options strategies, volatile markets and small trading accounts. He not only has single-handedly grown several small accounts into large portfolio margin accounts within just a few months, but he has also helped countless people achieve the same results.

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