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You already know how trading options can be one of the fastest ways to make money in the stock market. But there's more to options than buying calls and puts. Today, we'll show you how more advanced options trades – like the butterfly spread – are actually quite simple and can be even more profitable.
You see, these advanced options trades involve buying or selling more than one option at the same time. That might seem complicated, but once you understand how it works, you'll see it's rather easy to do.
And the profits can be huge – we're talking 200%, 400%, and even 600% gains – all while reducing risk.
The three main reasons to use combinations of options are when you think the price of the underlying stock is going to move a lot, move a little, or hardly move at all.
You don't need to know which direction the stock price will move to make money, just that you expect it will move (or not). That makes these trades especially good for upcoming events or when you spot a technical pattern on a chart.
Here are three options trading strategies that could help you cash in no matter what the market does next…
How to Use Options Straddles
To straddle a stock, you buy both a put and a call on the same stock with the same strike price near the stock's trading price with the same expiration date.
This is a great way to capture a big move on the stock when you don't know which way it will move. For example, if you know Wall Street is completely dialed into the next earnings release for a company, you can cash in whether the stock surges or plunges after the report comes out.
If the stock breaks higher after the earnings call, your call options will rise in value. If the stock plunges on some bad news in the report, your put option will rise in value. You limit your upside by buying both a call and a put, but you'll come out well ahead as long as the stock moves far enough in one direction.
The other potential downside is cost because you have to buy two options up front. One modification to this strategy is called a "strangle," and it achieves the same goal with a lower cost.
Instead of buying at-the-money calls and puts, you buy out-of-the-money options, which cost less. The tradeoff is that you need a bigger move from the stock before this strategy becomes profitable.
You can also use straddles and strangles if you think the underlying stock is not going to move at all. Instead of buying options, you sell them. That way you collect the premium on the options right away. As long as the stock doesn't move, you get to keep the premium without anyone exercising the options.
And we can reduce our risk even more with spreads…
How to Use Options Spreads
To use an options spread, you buy and sell the same type of option (either puts or calls) but with different strike prices, expiration dates, or both.
If you buy and sell options on the same stock with the same expiration date but different strike prices, it's called a vertical spread. The name vertical comes from how the options are quoted on your screen, usually in a matrix with strike prices listed above one another.
The idea for a spread is that you think the underlying stock will move modestly in a certain direction, but you want to reduce your risk in capturing that gain.
For example, you buy a call option with a strike price just below the price of the stock and sell an option with a strike price just above the price of the stock. Your risk is limited to price plus the commission cost, if any, you paid to initiate the spread trade.
In other words, the option you sell partially pays for the option you buy so you risk less money.
Another kind of spread is called a calendar spread because you buy and sell options with the same strike price but different expiration months. You can also use two options on the same underlying stock with different strikes and different expirations. This is called a diagonal spread.
But one of our favorite options strategies is the butterfly spread. It's one our subscribers have used to bank some of the biggest gains on options, including a 643% winner…
How to Use Butterfly Spreads for Big Gains
You can get even more complex with your strategies but still keep costs down. A butterfly spread is a strategy where you buy and sell four options with three different strike prices. It sounds complicated but is simple once you see how it's done. Basically, it's a spread of spreads that can make you nice profits while cutting your costs by as much as 75%.
Money Morning's options trading specialist, Tom Gentile, used a butterfly spread to net his readers as much as 643%. The reason is that the initial cost was so low that a reasonable move in the underlying stock produced huge percentage gains.
Options Trading Made Easy: Tom Gentile's readers asked for "actionable, specific insight" on how they can get rich trading options. So he's giving out an all-access pass to his 7-day trading Cash Course for just $1. Learn more…
Just keep in mind that there are two ways to implement this strategy. One is for when you think the underlying stock will make a nice move in one direction or the other. And the second is when you think the underlying stock is not going to move much at all.
It's called the butterfly spread because the four trades involved mirror the shape of a butterfly. The wings are the option with a strike price below the current price of the stock and the option with a strike price above the stock's price. The thicker body comes from the two options with a strike price in the middle that you sell.
The credit you receive for selling the two middle options helps offset the prices you pay to buy the "wing" options, reducing your net cost. You profit if the underlying stock does not move much.
You can also, sell the wings and buy the body. For this butterfly, you profit if the stock makes a decent move higher or lower.
You see, there are options strategies for every level of investor. All you need is a little education and the patience to start simple and move to more complex strategies as you improve your skills. Options are not just for the pros anymore.
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In fact, throughout his trading career, he's uncovered an arsenal of unique, yet highly lucrative patterns in the market that virtually no one else can see.
Until now, he's been keeping these options trading secrets to himself, using them to build his own million-dollar fortune.
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