all right Al righty so in today's video I'm going to be sharing with you a very interesting strategy and I'm pretty sure that this is a strategy that you do want to implement and one that you'll be very interested in why well it's because this strategy is 100% risk free there is absolutely no risk in this strategy and this is not a scam right this is a 100% legit strategy that you can actually put on that takes away all all the risk that you have which means to say there is no Capital risk at all for this option strategy right so what is this 100% risk-free strategy and in the first place is it really even possible well let's find out together so what is this strategy this strategy is none other than the 100% risk-free butterfly right so if you guys are familiar with the butterfly I'm sure you know that the butterfly do have some risk although the risk reward is you know pretty good good right but you still have some risk so you might be wondering how is it possible to have a 100% risk free butterfly right so for this strategy I have some good news and some bad news right so the good news is that this can definitely be done right so it's 100% legit 100% risk- free if you can put it on then you have eliminated all risk from the trade right but the bad news is that there is a condition that has to be met in order for you to be able to construct the 100% risk-free butterfly right so it's a little bit like you have to nurture it so just imagine this right when you first start it off it has to be like a caterpillar right so in case you're not sure what I'm doing right now I'm actually drawing a caterpillar definitely doesn't look at it right now but iure you it is a caterpillar as long as my GD one you know artistic skills actually show so this is a caterpillar right caterpillar with eyes no it's it's not a center pit it is a caterpillar so it starts off as something like a caterpillar and in order for it to become a 100% rree butterfly certain conditions have to be met then it will become a beautiful risk-free 100% risk free butterfly so this is a butterfly and and wow I'm I'm pretty impressed with my butterfly right it looks pretty good right definitely much better than the caterpillar so how do you know this is a 100% risk free butterfly well you have to look at the wings right you need to see whether the wings actually say 100% risk free butterfly right so if you see a butterfly in your garden right and it flies by and you see that on its wings it has 100% risk-free butterfly rden on it catch it right because this is how you actually construct the 100% risk free butterfly all right so enough nonsense so how do you create a 100% risk-free butterfly so the thing is that for you to get into this construct where there's absolutely no risk for the butterfly it doesn't actually start off as a butterfly right so remember I shared you the picture it starts off as a caterpillar so what is this caterpillar well this caterpillar is basically the put ratio spread so you have to put on a put ratio spread first where going to be some risk obviously right because the put ratio spread is not a risk-free strategy right so you have to start off with a put ratio spread and if you're not familiar what the put ratio spread is it's basically just two short puts that is very far out of money and one nearer you know long put option right slightly closer to where the market is right so again if you want to think of it in a much easier way is pretty much a short putut right imagine this two short putut you split up it's pretty much just a short putut that is financing a put debit spread so you have one uh long put and one short putut so down here this is the put debit spread right so this is the put ratio spread you have to start off as a put ratio spread first so as an example let's say you sold the 1 19195 put ratio spread for $844 credit right so this is the first step now the second step is that you want to select the further out of the money put that is equidistant from the other long putut so what you're trying to do here is now you're trying to convert it into the butterfly right so remember the butterfly is nothing more than the defined risk version of the put ratio spread now in order to converted into this uh risk-free butterfly then you need to select the out ofth money long putut that is equidistance from the other long putut and this is very important so what do I mean by equidistance so for example this is the distance or rather the spread of the put ratio spread that you put on right as you can see it's Five Points wide from 1 190 to5 so for you to get an equidistance strike then on the other side you also need it to be five points wide so 1 90 minus 5 that is 185 so what you're doing is that you are capping the risk all the way to the downside so to speak right basically you are um turning it into a butterfly with this long put now why is it important to make it equidistant right it's important to make it equidistant because if you were to choose the 184 strike let's say you choose the one that is six points away now it's no longer 100% risk free because now you're going to get some risk remember the whole structure of this butterfly the profit is basically what you get down here right the profit is based off this debit spread that you have right it's the embedded debit spread of this whole structure and then the max loss down here is basically also the uh width of this spread that you have on the downside so basically what you have down here this is the credit spread this is the debit spread so the max profit of debit spread is going to be $500 because it's 5 Points so if it's equidistance then the max loss is going to be $500 as well so anything past 18 185 there's no risk but if you choose 184 now suddenly you have a 6o wide credit spread on the downside and what the means is that your max profit from your debit spread which is only $500 cannot cover the max loss of the six points which is $600 right which means to say there is going to be a risk of about $100 on the downside so if you want to crft one that has 100% risk- free then you definitely want to choose an equidistance strike basically the same width as the embedded debit spread of your initial put ratio spread next step step number three also a very important one and that is to place a limit order to buy that put option for less than the credit that you receive so here's an example so you place a limit order to buy the 185 put for a140 or less so very important right so you want to make sure that when you are placing the limit order you're buying it for less than the credit that you receive because if you were to put it more than the credit that you receive then it's no longer going to be a 100% risk-free butterfly right there's going to be some risks right it's just like you you know for example your wife asks you to go down to the convenience store or the grocery store to ask you to buy something and she tells you that you know her budget is $50 see whether you can get it for less than that but instead you go to the grocery store and instead of just using the budget of $50 you see so many other things that you want to buy and you end up buying a total of over hundred over dollars right so you go back to your wife and you tell your wife that you know instead of spending that $50 you spent over $100 and that is when your wife is going to do to you what most options generally do and that is to make you expire worthless right so if you do not want your wife to make you expire worthless then guess what you need to be a man do the right thing make sure that you spend within the budget that she gave you and in fact if you buy much lesser than the budget she gave you she's going to be so happy that not only is she not going to make you expire worthless she's probably going to R you to the next expiration date right so she's going to keep you around for much longer and keep rolling you and the best thing you know that you know you've made it right is when your wife has actually rolled you into a leap so if she rolled you to a leap then you have you know one to two years of free time basically right and basically you can do whatever you want until the time comes where you're going to expire worthless again you better be sharp and not do anything to anger your wife all right so basically the point here is that do not you know pay more than whatever the credit that you receive down here okay so if you want it to be 100% risk- free just make sure that whatever you're buying that long put for is less than the credit that you receive for the put ratio spread now the final step step number four basically you've already done all the work right you sold the put ratio spread you've already selected the equidistant long put and then you place a limit order that is less than the credit that you sold it for ensuring that it's going to be risk- free now all that's left is to pretty much just wait until you get fill right so if you get filled then congratulations this is where you now have a 100% risk-free butterfly right so I'm going to give you an actual example to show you one of my trads that I converted it from a put ratio spread to a 100% risk-free Butterfly by the way if you like this video so far Please Subscribe and also click the thumbs up button and also do get your free copy of the options income blue blueprint where I share the top three options strategies that help you generate a consistent income each month trading just one to two hours a day right so if you want to go ahead to get this copy just head on over to options with davis.com blueprint all right back to the video right so as you can see down here this is a put ratio spread that I put on so I sold the 1831 189 put ratio spread for a credit of 32 cents right so I'm going to receive $32 in terms of Premium upfront so so as you can see down here this is the structure of the put ratio spread so again this is where the short put is at the two puts down here and then the long put is over here right you have the one long put and this is where the current market price is so as you can see whenever we are putting on the put ratio spread we want the put ratio spread structure generally I like it to be below where the current market price is basically this T down here from this point to here I want this T to be below where the current market price is now the next step as you know is to identify where this equidistant long put is right so as you can see down here the put ratio spread that I have on is 18389 so that is 6. y so where do you think that equidistant long putut is going to be it's going to be 6 point away from where this short strike is so this short strike down here is 183 so I'm looking for one that is six points away right six points away so what is 6 points away from 183 the answer is 177 right so I need to choose the 177 strike the long put over there to pretty much just build this 100% risk-free butterfly so after some time the equidistant long put at 177 which is 6 points away from the shot put as I mentioned is now marking at 25 cents so at this point let me ask you this question does it look like we can put this on for a 100% risk-free butterfly well the answer is yes because now I'm buying that put option which is lesser than the credit that I received up front right so as you can see down here right now I am able to construct this uh put ratio spread turn it into a 100% risk-free butterfly right so that's exactly what I did so I bought it and I got fill b 1 cent better so basically I bought it at 24 cents as you can see down here so what does this mean it means right now I pretty much have the 100% risk-free butterfly put on and in fact you notice that there's absolutely no risk whatsoever on both sides right you can see down here this is the0 pnl level you can see that the line down here is actually above zero right so we have two points down here this point and this point down here which means to say that if if the market settles anywhere past this point or below this point down here then I'm just going to get the minimum profit so what is the minimum profit the minimum profit is basically the difference from the credit that you receive upfront and what you purchase the long put for so if my Ms didn't fill me then you can see that the difference is 8 cents which means to say there is a minimum profit of $8 right if it goes past this point down here or it goes past this point over here so as you can see not only do I have no risk on the structure I actually have a minimum profit and the best thing is that if the market actually trades down to somewhere inside this 10 at expiration okay so basically this is where the current market price is if you cannot see all right this is where the market price is now if the market trades down and it lands somewhere around here at expiration then this is where I'm going to get much more than the minimum profit and if it doesn't reach inside here then guess what at least I still get some profit so by buying the equidistant long put I now have 100% zero risk right now it is 100% risk free I have a minimum guaranteed profit as well as I mentioned because that's the difference between the credit you receive up front and what you bought that long put for and now you have your buying power reinstated right your buying power requirement is no longer used for this trade because you have pretty much turn it into a risk-free so whatever that was stuck previously for putting on this trade has now been released and now you can put on another trade that you want to and this structure is still on right this structure is still there for you for the possibility that the market can trade inside here and you can make much more than the minimum profit so imagine this imagine where you have reached the point where you have put on so many of this 100% risk-free butterfly that you know as long as the market trades to any one of those butterflies it's going to have a chance for you you know to make the profits that is somewhere inside this tent now at this point you might have a question or maybe you might not but I want to bring this question to your attention is you know what is the cons of actually you know turning the put ratio spread to a 100% risk free butterfly because as you know I love my put ratio spreads right so uh if you were to turning into a 100% risk-free butterfly is there any catch right so the only thing is that number one first of all you may not actually have the chance to turn it into a 100% risk-free butterfly because it all depends on whether this down here can actually go down to below you know the credit that you receive UPF front right so if you receive for 32 cents you need to wait for that equidistant long put to actually drop below 32 cents for you to convert it into a risk-free butterfly but let's say for example if the market trades down from the moment you put on the put ratio spread then chances are this price down here this lput it's going to be increased right it's definitely most likely going to be much more than 32 cents because now that put option is going to be slightly closer to where the current market price is as the market trades down so it's not always that you can actually construct you know every put ratio spread and turn it into a 100% risk-free butterfly it really depends on the underlying and and also you know whether the Decay is fast enough to reach a point where it's lesser than the credit so that's the very first point now the second Point let's say for example you are actually able to turn it into a risk-free butterfly then the conss or rather the thing that you're going to give up is pretty much just this credit down here right so this amount you have to actually uh pay for it right it's 25 cents which means it's $25 what it means is just this right so this is where the current market price is okay this is the market price so let's say for example if you put on the put ratio spread and the market actually stays above around here at this point or maybe the market goes up if you did not actually buy this long put for 25 cents then you would have actually gotten the full 32 cents in terms of the premium you receive up front right so it's a $32 profit for you up front but because you've actually bought this long put then you have given up $25 which means to say if the market just stays somewhere down here right basically above where your tent is then you're only going to get roughly about $8 right 8 C so that is pretty much the only con that you're going to have for converting the put ratio spread into the 100% risk-free butterfly all right so this is how you get a 100% risk-free butterfly and if you like this video I greatly appreciate if you give me a thumbs up on this video by the way if you like this video then you're absolutely going to love this next video which I have for you so go ahead and watch that video right now also if you haven't already gotten your free copy of the options income blueprint you can do so just by clicking this link down here on your screen and you'll be able to get it for free all right I will see you in the next video