Lecture on 100% Risk-Free Butterfly Strategy

Key Points

• Strategy Overview: The strategy is 100% risk-free and legitimate, ensuring no capital risk.
• Concept: To create a risk-free butterfly option strategy, starting from a put ratio spread and converting it into a butterfly.
• Analogy: Just like a caterpillar transforms into a butterfly, the put ratio spread evolves into a risk-free butterfly.

Steps to Create a 100% Risk-Free Butterfly

Step 1: Initiate with a Put Ratio Spread

• Definition: Consists of two short puts far out of the money and one nearer long put option.
• Example: Sell 1.90-1.95 put ratio spread for $844 credit.

Step 2: Select Equidistant Long Put

• Importance: Ensures no risk and balanced structure.
• Calculation: The distance between strikes should be equal.
• Example: If the put ratio spread is 1.90 to 1.95 (5 points wide), then choose 1.85 (5 points wide from 1.90).

Step 3: Place Limit Order

• Condition: Buy the long put for less than the credit received.
• Analogy: Spend within budget, similar to ensuring purchases are within limits.
• Example: Place a limit order to buy the 1.85 put for $140 or less.

Step 4: Wait for Fill

• Completion: After placing the order, wait until it gets filled.
• Example: Convert a put ratio spread to a risk-free butterfly by ensuring no risk on both sides and having a minimum guaranteed profit.

Practical Example

• Put Ratio Spread Example: Sold 1.83-1.89 put ratio spread for 32 cents credit.
• Equidistant Long Put: Choose 1.77 strike (6 points away from 1.83).
• Result: Bought the long put at 24 cents, ensuring a risk-free structure with a minimum profit of $8.

Considerations and Cons

• Dependence on Market Conditions: Success depends on whether the long put price drops below the credit received.
• Potential Con: Giving up some of the initial credit received for ensuring the risk-free structure.
• Example: If the market stays above the tent, the profit is the difference between initial credit and the cost of the long put.

Summary

• Final Thought: Strategy enables profits with zero risk by converting put ratio spreads to risk-free butterflies efficiently.

Additional Resources

• Options Income Blueprint: Free copy available for further learning on similar strategies.
• Next Steps: Watch the recommended video for more insights and practical applications.