to be sure butterfly spreads are the right
choice for you before placing any trades.
Continuing our pretend TV watch-
ing, since GVRC is announcing
earnings after the close, perhaps you’ll
decide to watch Swim Lessons. The hosts
may walk you through examples of differ-
ent butterfly strategies you could apply to
GVRC: bullish, bearish, or neutral. (Feel free
to do further butterfly research through the
show’s archives.) You can also follow along
with the hosts by trying out
new strategies using your
Head over to the Analyze
tab on the thinkorswim
platform, choose the strike
you want to trade, right-click,
select “Analyze buy trade,” then select “But-
terfly” from the dropdown menu (Figure 2).
The order will be displayed in the Positions
and Simulated Trades window. Next, check
out the trade’s risk profile. You’ll see a risk
curve that looks like a witch’s hat (Figure 3).
The purple line is your profit and loss, and
the cyan line is your strategy’s risk curve.
Consider the probability of a price hitting a
certain level, the max profit potential, max
loss, break-even point, time decay, assignment risk, and expiration risk. Each strategy
delivers different data. In the case of a butterfly, the cost is lower, but so is the probability of profit. But at least the risk is defined.
And don’t overlook the greeks, especially
theta, as options get closer to expiration. Remember that in a butterfly, all four positions
have the same expiration. So you may not
see profits until a trade is close to expiration.
MAKE A TRADE?
Let’s assume you’ve moved be-
yond the paper phase because
you’re prepared to take on the risks of the
strategy. You like your chances on the GVRC
butterfly. You’ve crunched the numbers to
identify the trade’s cost, determined your
max profit potential, and analyzed the risk.
Now you can place the trade directly from
the Analyze tab or the Trade tab. Select the
strikes, then hit the Confirm and Send but-
ton. You’ll see an Order Confirmation Dialog
window (Figure 4) that gives you one more
chance to study the trade before sending the
order. You’ll see breakeven price levels, max
profit, max loss, cost of trade (including com-
missions), and your buying power effect. Still
look good? Hit “Send” and wait for the order
to be filled. If you have a change of heart, go
back to the drawing board. You might want
to play around with different strikes or dif-
ferent strategies like straddles, iron condors,
or something a bit less complex like vertical
spreads—assuming you have studied the
risks associated with each and are prepared
Hungry for even more? You can always
keep one ear on the TD Ameritrade Network, which broadcasts beyond the market’s close. Tune into Swim Lessons, or
Market on Close, which offers insight on
announcements past the bell.
PERSONAL TRADING ASSIS TANTS ARE
still a thing of the future. In the meantime,
the digital age brings you real human voices—veteran analysts who are passionate
about trading and can help make the journey stimulating and fun.
FIGURE 3: How does the risk profile look? The risk curve of a butterfly resembles a witch’s hat with the
peak of the hat at max profit. But probability of that happening isn’t high. Source: thinkorswim® from TD Ameritrade.
For illustrative purposes only.
FIGURE 4: Order confirmation. Still like what you see? Are you comfortable with the risk-reward ratio?
If not, you can go back to square one and analyze different strategies. Source: thinkorswim® from TD Ameritrade. For
illustrative purposes only.
Jayanthi Gopalakrishnan is not a representative
of TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
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