Explore Your Options by Tom Gentile
A "BETTER" FLY POSITION
What can be done to make the long butterfly strategy more consistently profitable? The chances of a stock landing at the middle sold strike at expiration is not a high-probability outcome, so what might be considered during the life of the spread?
Great question. Itís important to be working with a range-bound stock or one thatís moving toward the positioned middle strike of the spread. Lower statistical volatility stocks might also provide a more consistent opportunity with the long butterfly.
Lower volatility is a good characteristic because the two embedded verticals making up the butterfly should react more favorably than a high-volatility situation. All else being equal, the in-the-money vertical position expands toward its maximum profit potential and the out-of-money loses its extrinsic value quicker than if volatility is elevated. Once a butterfly position shows some profit, various adjustments can be considered to increase oneís odds of more consistent results.