INTC - How to Use an Options Call Butterfly for Rangebound Stocks | Benzinga
Stocks can be very exciting when they trigger breakouts and breakdowns, forming strong price trends. However, the reality is that stocks usually tend to be rangebound in a consolidation. Whether it's small or large, stock prices tend to oscillate within a range much more often than they trend.
If we assume stocks only trend around 30% of the time, the other 70% of the time can be considered consolidations. This applies to all stocks in any stock sector. While consolidations aren't bad, they give a stock time to rest before another trend move emerges; they can be choppy and frustrating for stock and options traders because of the head fakes and wiggles.
Using Options to Profit During Stock Consolidations
With stock options, you can capitalize on rangebound stocks during consolidations by using a call butterfly strategy. This is also referred to as a long call butterfly spread, call butterfly or butterfly spread. It's a multi-leg market-neutral strategy with a defined maximum loss risk and a capped maximum profit reward. It seeks to profit on the low volatility and theta erosion (time decay) as the underlying stock chops around in a consolidation range. It's also a strategy that can reap many times more maximum profit than risk.
The Mechanics of a Call Butterfly
This multi-leg strategy uses four call options with three different strike prices for the same stock and the same expiration. First we will want to identify a strike price that the stock is consolidation near or at-the-money (ATM). While, it doesn't have to be ATM, the max profit ...