Understanding Butterfly Options Spreads - Options Strategies

Butterfly Spread - Churning Out Consistent Monthly Income
By David Harms

A extraordinary trade for option investors who believe that the stock or index/ETF they are working with will be range bound for the next 2 or 3 weeks to a month or so of time is referred to as the butterfly spread.

This theta positive option trading system generates revenue for the trader when the main underlying or index/ETF on which it is being traded stays trading within a somewhat contained range on the graph - or - when the trading vehicle winds up on expiration day at or close to the sold strikes of the trade.

An illustration of this option strategy is as follows: Buy 2 contracts of QQQQ 44 call. Sell 4 contracts of QQQQ 46 call. Buy 2 contracts of QQQQ 48 call. This is a 'classic' butterfly spread position - a 3 legged option strategy trade.

Butterfly spreads produce fantastic trades for income traders due to the fact the short strike (the strikes that are being sold) supply favorable premiums to the trader up front due to the fact they are being sold 'at the money' - or very 'near the money'.

While it is a fact that regular butterfly spreads are executed for a debit (rather than a credit like what the iron butterfly strategy trade gives off) - nevertheless - even so - it is the short strikes that we are selling that will decay over the time left to expiration and hand over to the trader gains.

The butterfly trading strategy is considered a 'delta neutral' option trading strategy. Investors who use this technique anticipate that the underlying will continue to be in the general location on its chart from where it was located when the spread trade was initiated to begin with. Unless the investor is attempting to place - or planning to place a directional based trade, the strikes of butterfly spreads are normally sold at the money - meanwhile the longs of the butterfly are sold away from from the short strikes usually at an equal distance and range apart on either side.

The Butterfly Strategy, when traded accurately, can be an extremely enjoyable and financially rewarding way to trade the marketplace to generate regular and consistent profits.

David Harms teaches various Butterfly Spread Trading Strategies and Techniques at the following blog: Butterfly Spread

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Bond Yield Curve Article - Bond Investors and Interest Rate Yield Curve

What Is a Bond Yield Curve and How Do Investors Use Them?

By Preston G Pysh  

The more advanced you become in stock and bond investing, the more familiar you'll become with a thing called a bond yield curve. This graph is probably one of the only tools you might find that can aide in predicting market trends. Since interest rates are ultimately controlled by the Federal Reserve (FED), tracking the way that the FED adjusts these rates can really help your investing approach.

The yield curve is broken down into two axis'. The x-axis is the term of the federal bill, note, and bond. While the y-axis is the corresponding yield for each of those securities. In order to show how all the investments are inter-related, a line is drawn between them on the graph. If you'd like to see what a yield curve looks like, simply google the term and you'll see a multitude of examples.

You see, the FED is completely reactionary. If the market goes down and jobless rates increase, they increase the supply of money so interest rates decrease. Inversely, if the market is booming and employment is very high, the FED gradually raises interest rates in order to prevent a future market bubble. This cycle, which some argue is the result of the FED itself (and I kind of agree), is something that will continue to occur in the future as long as we have a central bank for the country.

So how can you take advantage of this behavior as a stock and bond investor? Well for starters, let's talk about bonds. We know that the market value of a bond is directly related to interest rates. If we look at a current bond yield curve in 2012, you'll see a positively sloped graph that depicts the yield on long term bonds much higher than short term notes and bills. This is important because it's the FEDs way of saying, "Hey we don't think these low interest rates are going to last for a long period of time. In fact, over a 30 year period we think the average yield will be X (insert the yield from the intersection of the 30 year bond and line on the chart)" Knowing that the market value of a bond decreases when interest rates increase, we can rest assure that buying bonds in 2012 is probably a very poor financial decision.

With respect to stocks, we know when the yield curve is positively slopped, short term interest rates are low and it probably means it's a great time to be purchasing common shares.

Although this article only provides a very quick and ruff way to examine yield curves, active investors should really try to learn more about this wonderful tool.

If you would like to watch a 15 minute YouTube video on how bond yield curves work, be sure to click on this link. This takes you to a wonderful site that shows you how to access bond yield curves and applies the information to previous market conditions.

Article Source: http://EzineArticles.com/expert/Preston_G_Pysh/1381442

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