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Trading The Short Put Butterfly Strategy

This is the last article in the butterfly series.

Here are the rest:

1. Long Call Butterfly
2. Short Call Butterfly
3. Long Put Butterfly

… and this article is on Short Put Butterfly Strategy.

Note that the Long Call and Put Butterfly strategies work when Nifty expiry is very near the ATM strike that was sold. A credit is required to play the trade therefore the trade is called long butterfly.

Short Call and Put Butterfly works when Nifty is more than 100 points away in any direction from the ATM strike on the expiry day. The trader gets a credit therefore its called the short butterfly.

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How To Trade A Long Put Butterfly

I have already discussed how to trade Long Call Butterfly and Short Call Butterfly. This article discusses how to trade a long put butterfly.

Note: Most traders I have talked to like to play butterfly with call options and not with put options. I think it has more to do with human psychology than anything technical. We love to buy call options more than the put options, don’t we? I do not know the reason why, but I think we perceive markets going up more rather than down.

The fact is, it does not matter what option you are choosing to play a butterfly with, the risk reward will remain the same. Whether you trade a long put butterfly, or a long call butterfly – the risk and reward will be same.

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Greed is Not Good in Stock Market Trading

I hear a lot of stories on how people lose money trading options. Most of them are not worth sharing. But this one stands out and I thought I should share this with visitors of my website who are looking to buy that option for a big home-run. I do not think anyone in this world exists who has had a real home-run buying options (I mean made so much money buying options that they can now stop trading and live a comfortable life). Yes, you will find people who are doing well trading options – but they have a solid strategy that they master.

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Most traders, not just in India but the whole world wonder if they can make enough money from trading to live a comfortable life. Yes the real question is if they can leave their day jobs and make similar amount trading the stock markets to feed their families.

Well frankly I really don’t get this. Why everyone want to leave their jobs? Lets keep it for another day.

I get many phone calls and mails asking something similar on the above lines. However recently I got this email from one of my subscribers Mr. Chandirasekaran which is quite interesting and I would like to share his question too. I have taken his permission. My answer follows the question.

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One of the best things about this website is that I come to know some amazing and some not so amazing traders in India.

Well unfortunately most traders are losing money. :( Why people lose money is that they do not have a trading plan to execute when their prediction goes wrong. They simply do not know where to take a stop loss or to book a profit. I mean when you trade you should have a trade plan in place. You should know clearly when to take a stop loss and when to take out profits.

If you take a stop loss at 50% of your profits – even if you are right 50% of the times – you will make money. Risk management is the most important decision in trading which everyone forgets.

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How To Trade Short Call Butterfly

If you have read my post on Long Call Butterfly, this trade will be easy for you to understand. Results for the Short Call Butterfly will be exactly opposite of the Long Call Butterfly.

Lets discuss the trade straight away.

When should you trade Short Call Butterfly?

You should trade this strategy when you think that Nifty will move away from the current strike and expire 100-200 points away on the either side – up or down does not matter.

Three trades are involved (note that these trades are exact opposite of the Long Call Butterfly):

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How To Trade Long Call Butterfly

Most traders who call me to inquire about my course tell me that they know how to trade a butterfly. In fact this is first of the many trades they tell me they know. Strange it seems, but it looks like most Indian retail traders love to trade butterfly. Well frankly butterfly trade is not as easy as it seems and contrary to what many traders believe, it is a trade where some kind of prediction is required. Technically therefore it cannot be considered a non-directional trade.

Personally I stay miles away from a trade that needs any kind of prediction.

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Short strangle is exact opposite of long strangle. I will discuss it soon but before that I would like to tell something. Since I started the options trading course many traders have called me. Most of the traders actually trade this particular trade and you know what, they lose money.

I feel bad when I see that most traders lose money. I can only see that the main reason is greed. You will soon learn that short strangle is such a trade that it will tempt you to be greedy. This is a trap and most traders fall for it. The results? They lose money.

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Why I Do Not Offer Nifty Option Tips

A lot of my customers of the options trading course asked me a question – why I do not provide Nifty option tips?

Well two reasons actually:

1. I am an active trader. If I start providing tips my whole psychology will change as my mind will not be free. When my own money is at risk, it is OK to trade freely. I know that even if there is a loss, I will manage it and make money from the next trade. But when I know that a lot of people are following my trading tips blindly, I will either wait for the best time to enter the market which may never come for days and/or try to make money from every trade which is impossible. I will not be able to trade freely. Everyone will suffer.

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All over the world especially the US, volatility trading is very popular. Its has a lot of benefits. For example if you have a big portfolio of stocks and you feel the stock markets in general may head south (going down) and the volatility will increase, you can buy the volatility futures. In that way if it increases, you can make money.

What is Volatility:

Well volatility is nothing but the “fear factor” in the market. If there is a lot of fear, like a war going on, or some kind of big news coming the volatility usually goes up. If there is any kind of uncertainty in the markets, in the country of the stock market or the world itself (like war between two countries, big bank declaring bankruptcy or any country’s economy showing signs of recession etc), the fear factor will increase. If fear factor (the risk factor actually – the risk of investing in the stock market) increases, the volatility will reflect that. If volatility increases the option prices – calls and puts – both will increase. If volatility decreases the option prices – calls and puts – both will decrease.

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