{"id":41165,"date":"2015-06-07T21:19:47","date_gmt":"2015-06-08T01:19:47","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=41165"},"modified":"2015-06-30T14:49:36","modified_gmt":"2015-06-30T18:49:36","slug":"broken-wing-butterfly-trade-example-on-lnkd","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/broken-wing-butterfly-trade-example-on-lnkd","title":{"rendered":"Broken Wing Butterfly Trade Example on LNKD"},"content":{"rendered":"

For decades, expert options traders have been relying on a variation of the ever popular butterfly trade to enhance their monthly income and allow them to safely include a directional bias to their trading.<\/p>\n

The Broken Wing Butterfly (BWB) is a more advanced trade, not because it is difficult to understand \u2013 but because there are more nuances that require expertise in order to execute the trade effectively.<\/p>\n

Let\u2019s say hypothetically you believed LNKD (LinkedIn) would be trading near support within the next 30 days. Before understanding options strategies, a trader may think the only way to profit if this idea is correct would be to short the stock.<\/p>\n

With a very basic understanding of options, you realize there are additional strategies available to you. You can sell calls, buy puts, or use vertical spreads to define your risk.<\/p>\n

Let\u2019s look at the pros and cons of these strategies.<\/p>\n

Shorting the stock: <\/strong>
\nPro: You can win big if you\u2019re right
\nCon: You MUST be right to win<\/p>\n

Selling Call Verticals:<\/strong>
\nPro: You can win even if you\u2019re a little wrong
\nCon: You can lose more than you can make<\/p>\n

Buying Put Verticals:<\/strong>
\nPro: You can make more than you can lose
\nCon: You must right on the direction, how far, AND when<\/p>\n

What if there was an options trade that can let you win if you\u2019re a little wrong and also gives you a favorable risk vs. reward?<\/p>\n

Enter the Broken Wing Butterfly\u2026<\/p>\n

In our example we can see that if we\u2019re wrong the maximum loss to the upside is $309.50. It doesn\u2019t matter how far the stock runs up\u2026 that\u2019s the extent of the risk if we are wrong on direction.<\/p>\n

This trade centers a butterfly at 195 which is below my target of 200, however it uses a ratio of contracts to reduce my upside risk. \u00a0Here\u2019s the trade profile at initiation.<\/p>\n

\"LNKD<\/a><\/p>\n

The only way to have a risk greater than the target reward is to actually be too right about the direction. The probabilities of a favorable risk vs. reward are in your favor with this trade, but you will need to have conditional orders, alerts, or watch the trade to make sure you are out before it moves too far in your favor.<\/p>\n

Most traders don\u2019t find they have a problem with being too right. More often than not, they are wrong about direction or wrong about timing. The BWB options trade allows you to control risk in those two circumstances.<\/p>\n

Then, analyzing the trade 30 days from now, our target of 200 on LNKD shows a profit of $502. At expiration (43 days from entry) it\u2019s even better, with a potential profit target of $1,193.<\/p>\n

\"LNKD<\/a><\/p>\n

Ultimately the BWB gives you the three following edges<\/p>\n