What if a stock has run out of steam and we’re anticipating a period of consolidation or lower volatility for a period of time? What if we have identified a range-bound stock and we want to take advantage of this price pattern behavior? We can achieve this by trading low-risk, high-reward options strategies! The two strategies we’ll discuss in this chapter are the Butterfly and the Condor, both of which produce profits provided the price remains within a certain price range, determined by the Exercise prices we select.

Butterflies

The Butterfly involves the following steps (you can use all calls or all puts with the Butterfly—you cannot mix the two):

Butterfly with Calls

Step 1 Buy 1 lower strike (ITM) call

Step 2 Sell 2 middle strike ATM calls

Step 3 Buy 1 higher strike (OTM) call

There are two key points here:

  1. The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
  2. The distance between the three adjacent strikes must be equal, with the middle strike being ATM or as close to ATM as possible.

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