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A great tactic for income traders who think the stock or index they’re trading will most likely stay contained within a range for the short term is the butterfly spread .

This theta positive option strategy produces profits when the stock or index that is being traded remains within a contained range on the graph or ends up on expiration day at or near the short strikes of the trade.

Here is an illustration of this tactic:

Buy 2 contracts of 120 puts. Sell 4 contracts of 125 puts. Buy 5 contracts of 120 puts.

These trades can generate fast gains for the investor as a result of the fact how the short strikes of the position (the strikes which are sold) deliver so much premium into the traders account because of the reason that they’re being sold ATM or ‘at the money’. Strikes that reside ‘at the money’ generally contain the greatest amount of time premium in them.

While you can find numerous mutations of the butterfly spread, the two most popular are the standard butterfly distribute which is traded for a debit, and then there’s the iron butterfly, which is put on for a credit. It is true that these two individual versions of the butterfly spread are indeed different, if you would look at the risk graph of one and then compare it to the other, they would look exactly the same, and they actually perform the same as well.

The butterfly method is a ‘delta neutral’ trade, meaning that investors who use this technique either don’t have an opinion on marketplace direction or believe that the underlying being traded will remain in its general vicinity on the price chart for the duration with the trade.

With the proper knowledge, the butterfly spread can be a lucrative, low pressure, and pleasant investing system that doesn’t require one to be glued to their computer screen stressing out over every tick of the market all day.

While butterfly spread trading can be a great way to generate passive income, of course like any investment method there are potential pitfalls one should be aware of before jumping in. To learn more about how to properly trade this option strategy, go to this Butterfly Spread site now.