Small Account? Here's How to Trade a Big Market

Key Concepts

• Broken Wing Butterfly: An options strategy designed to profit from limited price movement in the underlying asset. It involves buying and selling options at three different strike prices.
• Strike Price: The price at which an option can be exercised.
• Credit Spread: An options strategy where a net credit is received when the trade is initiated.
• Expiration Date: The date on which an option contract expires.
• Max Profit: The maximum potential profit from an options trade.
• Risk/Reward Ratio: The relationship between the potential profit and potential loss of a trade.
• Implied Volatility (implied through trade selection): The market's forecast of a security's future volatility.

XOM (ExxonMobil) Trade – Upside Broken Wing Butterfly

The first trade discussed focuses on ExxonMobil (XOM), currently trading at $150, anticipating a potentially choppy, sideways movement with a slight upward drift. The strategy employed is a broken wing butterfly, constructed using call options with an April 17th monthly expiration.

Specifically, the trade involves:

• Buying one XOM call option with a $155 strike price. This establishes the upper boundary of potential profit.
• Selling two XOM call options with a $160 strike price. This generates the initial credit and defines the peak profit zone.
• Buying one XOM call option with a $170 strike price. This limits the maximum loss if XOM rises significantly above $160.

The trade is initiated for a credit of approximately $0.25 per share (or $25 per contract, assuming a standard contract size of 100 shares). The maximum potential profit is $500, achieved if XOM’s price remains near the $160 strike price at expiration. The trade is designed to have limited risk to the downside, meaning losses are capped regardless of how far XOM’s price falls. The trader is “playing for a choppy sideways move to the upside,” suggesting a belief that XOM will not experience a large price swing in either direction.

SPY (S&P 500) Trade – Downside Broken Wing Butterfly (Smaller Account Focus)

The second trade, presented by the speaker’s father, centers on S&P 500 put options, also with an April expiration. This trade is specifically tailored for traders with smaller account sizes, responding to requests received via battylive.com. Like the first trade, it utilizes a broken wing butterfly strategy, but with put options.

The trade details are as follows:

• Buying one SPY put option with a $650 strike price.
• Selling two SPY put options with a $640 strike price.
• Buying one SPY put option with a $620 strike price.

This trade generates a credit of $0.79 per share (or $79 per contract). The risk associated with the trade is approximately $920. The speaker emphasizes that while the potential profit of $79 may seem small relative to the risk, it represents an annualized return of over 8.5% over the 53-day period until expiration.

He states, “Doesn't sound like a lot, but when you look at it, it's a little over an 8.5% interest rate over 53 days on your risk of a little over $900.” This highlights the strategy’s appeal for smaller accounts seeking to participate in the market with a defined risk profile and a potentially attractive return. The trade is positioned to profit if the SPY remains relatively stable around the $640 strike price.

Connecting the Trades & Overall Strategy

Both trades demonstrate the application of the broken wing butterfly strategy, a neutral options strategy. The key difference lies in the underlying asset (XOM vs. SPY) and the direction of the anticipated price movement (upside for XOM, downside for SPY, though both are expecting limited movement). The SPY trade specifically addresses the challenge of smaller accounts participating in options trading by focusing on a strategy with a defined risk and a calculated risk/reward ratio. Both traders are looking for limited volatility and a defined range for the underlying asset.

Conclusion

The presentation highlights the versatility of the broken wing butterfly strategy for capitalizing on anticipated limited price movement in the market. The XOM trade exemplifies a directional, yet constrained, outlook, while the SPY trade demonstrates a strategy for smaller accounts to participate in options trading with a defined risk profile and a focus on achieving a reasonable return. Both trades emphasize the importance of carefully selecting strike prices and expiration dates to align with the trader’s market outlook and risk tolerance.