One of my favorite things to trade is pure statistical advantages. A trade I have been doing lately is exactly that. As we outlined in a recent seminar, AAPL moves $10 (two strike prices) every four hours on average. This is a great piece of information that can be used to our advantage. Though several trades can benefit from a $10 move, it is difficult to time it just right. Rather than trying to time the move, it is easier to put a position on that is both long and short Theta (time decay). This way we can offset the erosion of time decay, providing us with a much bigger window of opportunity in which to be right. The best-fit position is the short butterfly and I favor $10 spacing between the strikes, although a smaller-spacing setup will also make money with less risk. The drawback with the smaller-spacing setup is the fact that the profit potential is diminished.
Assuming that you take your position off the table every $10 move and put on a new position, it is easy to scroll back through a chart and see just how well this trade has done. The reason I am looking for a $10 move is because the $10-spaced short butterfly becomes easily profitable at that point. Depending on how soon AAPL makes a move, the position makes either a lot or a little. Even if for some reason you had to wait three days for AAPL to move $10, it would still show a profit. Obviously the ideal scenario is to have AAPL move within minutes of entering the trade. I like to be at least three days away from expiration. If it is Wednesday or later, then I simply go out to the next week’s options. So far the longest I have had to wait is a day and a half before taking it off the table with a profit and structuring a new trade in its place. The $10-spaced short butterfly looks like this:
– Sell 10 435 calls.
– Buy 20 445 calls.
– Sell 10 455 calls.
You can adjust the contract size to suit your trading situation, but be sure to maintain the 1-2-1 ratio.
Bottom line, I am a huge fan of trades offering a statistical edge like this – the short butterfly has been a great income maker so far. I am currently working on formal training videos that will demystify the trade, enabling traders to better understand and take advantage of these tremendous income-producing opportunities. They will be in the training section of StockWizKid.com as soon as they are done.
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.