Using the Long Put Butterfly to Generate Weekly Income

Here’s a great article on using weekly options and long put butterfly’s to generate a weekly income.  I find it interesting that both the author and one of my mentors (a very successful option trader) say that butterfly’s are one of their favorite trades.

One of my favorite options strategies is the ‘long put butterfly’ spread. I will consistently use this strategy on range-bound stocks and ETFs, such as the Power Shares Trust (QQQ), Cisco (CSCO), Intel (INTC), Johnson & Johnson (JNJ), Walmart (WMT), and Microsoft (MSFT).

The key to this strategy is choosing a stock or ETF that has weekly options available and does not see large price swings during the week. For a list of weekly options available, please see this link.

The ‘long put butterfly’ spread is a debit spread, unlike the more often used ‘butterfly spread,’ which is a credit spread that has an options requirement.

One of the biggest mistakes traders make when using this strategy is using it with volatile stocks. For example, securities with large daily and weekly price ranges are a bad choice with this strategy. Molycorp (MCP), (PCLN), Netflix (NFLX), Google (GOOG), CF Industries (CF), Direxion Financial Bull 3X (FAS), Direxion Financial Bear 3X (FAZ), SPDR Gold Trust (GLD), and other similar stocks or ETFs fit this criteria.

This strategy should be placed preferably on a Monday or later when the options expire on a Friday. Time-value is not necessarily a good thing with this strategy. The less time that the stock or ETF has to make a large price move, the better.

Buying forward month options with this strategy can present a boatload of problems, and I highly discourage doing so. Another way to profit using this strategy is

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