Compare and Contrast: Butterfly vs Calendar

Video description: Let's compare and contrast an options butterfly trade and an options calendar trade. We'll start by discussing how they compare and then move on to how they contrast. Comparisons: 1. Strategy objective: Both options butterfly trades and options calendar trades are used by traders to profit from limited price movements in the underlying asset. 2. Risk/reward profile: Both strategies offer limited risk and limited reward potential. The maximum loss and maximum gain are predefined for both trades - BUT you have to be careful on the Calendar with 2 different expirations at play. 3. Combination of options: Both strategies involve combining multiple options contracts with different strike prices and the calendar uses different expiration dates as well to create the position. Contrasts: 1. Construction: - Options Butterfly Trade: In a butterfly trade, (also known as a vertical spread) three options contracts are used. It consists of buying one lower strike price option, selling two options with a middle strike price, and buying one higher strike price option, all with the same expiration date. - Options Calendar Trade: A calendar trade, (also known as a horizontal spread), involves buying and selling two options contracts with the same strike price but different expiration dates. Typically, a shorter-term option is sold and a longer-term option is bought. 2. Volatility impact: - Options Butterfly Trade: A butterfly trade is typically initiated when the trader expects volatility to drop. It profits from a decrease in volatility and a relatively stable underlying asset price. - Options Calendar Trade: A calendar trade gets very tricky with volatility and there a lot of misconceptions that calendars are +Vega trades that benefit from an increase in volatility and while they can, the opposite can also be true. With Calendars it is all about how the volatility (and corresponding options prices) change BETWEEN the front and back expirations - as such, they can be much trickier to model and predict. In fact, I will soon be conducting a 4-6 hour class on calendars to explore this all at a much deeper level. 3. Time decay: - Options Butterfly Trade: Time decay is a crucial component of a butterfly trade. The strategy aims to capitalize on time decay, with the hope that the underlying asset remains near the middle strike price until expiration. - Options Calendar Trade: Time decay also plays a significant role in a calendar trade. The strategy benefits from the faster decay of the shorter-term option's time value compared to the longer-term option. 4. Profit zone: - Options Butterfly Trade: The maximum profit in a butterfly trade is achieved when the underlying asset price is close to the middle strike price at expiration. Any significant movement away from this price range results in reduced profitability. - Options Calendar Trade: The profit zone for a calendar trade depends on the specific strike price and the difference in expiration dates. The trade typically profits when the underlying asset price is close to the strike price at the shorter-term option's expiration. It is CRITICAL to note that the tent of calendar will change with the change in volatility/prices of the front and back options where the butterfly tent will stay fixed and can be counted on. #steveganz #options #SPX #incometrading #RUT #butterflytrade #butterfly #ironcondor #condor #trading #optionstrading #stockoptions #indexoptions #SPXoptions #tradingstrategy #optionseducation #technicalanalysis #marketanalysis #riskmanagement #tradingpsychology #volatilitytrading #ironcondor #SJGtrades #butterflyspread #calendarspread #creditspread #debitspread #optionsexpiration #optiongreeks #optionsincome #Johnlocke #dansheridan #Sheridanmentoring #optionstrat