Using Options to Swing Trade – Any Other Strategies? #HungryForReturns 4

September 4th, 2018

Listen to the Podcast


Welcome to another episode on "Hungry for Returns" where I answer your trading and investing questions.

This week, we have a question from Jim about option trading and swing trading options.

In either case, if you have a question that you want me to answer in more detail such as a video format, then be sure to submit your questions on our website at

"Hi, Sasha. This is Jim. My question for today is -- are there any options such as butterflies that can be used for swing trading ideas? That's my question for today. Thanks. "

Basically, if we take a look here on screen, Jim's asking about swing trading ideas with options. Looking at a butterfly the way, that you can set a butterfly up. If you're not familiar with it, let's just take it from here with an Amazon.

Usually, when your swing trading, you're looking for an upside move. Multiple days to the upside now.

You could short things 3 to 5 days, 10 to 15 days, 30 to 50 days. Depending on how long you hold a swing trade for, but in either case, to make things simple. Let's look at an upside movement here.

If we're looking at a butterfly spread, let's just say we're looking at Amazon and Amazon right here. If we look at the chart right around the 1900 level, let's say we're looking for maybe a 1950 move, maybe a 2000 move.

If I look here to create this butterfly spread, let's just go ahead and buy a butterfly right over here and I'll analyze that trade so you can see what it looks like on the profit picture. Let me just spread these wings out a little bit more, just to give you a little bit of a perspective.

So, we'll have to play here with the strikes simply because those strikes are not traded yet. Let's say 2000, 1950 and let's just say 1940 and 2060 or so. so it goes in the 20s above there.

We'll go with something like this. You could see what a butterfly really looks like here on the profit picture.

It's looking for an upside movement and you make the most money over here as that stock continues to head higher. You lose about $745 if it doesn't move at all.

But, as it continues to move and it starts to decay, let's just say we continue to move as you know with options they continue to decay so round must say a month or so later. You're looking at maybe $500/$600 of profit, if you get into that $2,000 range.

Here's the thing with options and really you have to remember that options are just a tool.

When you're looking at a butterfly spread, iron condors spread, you're looking at diagonals, they're really just strategies. There's pros and cons to different strategies.

When we look at Amazon butterfly spread right here, this is a negative Vega trade. You'll get a little bit more benefit as the volatility declines.

You could do the same concept with let's just say a diagonal. So, let me show you what a diagonal looks like. Let's just do again about a 2,000 and I'll go ahead and buy a diagonal over here, analyze the trade.

You can see this trades a little bit different. I have a positive Vega on this one but it's still looking for an upside move.

Here, I'm risking much more okay because I'm going out multiple months because I have technically in October and a November one. Let me see if I knocked October here in November 18th. Yep.

So, we're splitting these months into between the October and the November. I'm creating a buying one and I'm selling the near month.

The one further out in time decays slower.

It's a little more expensive to put on this trade. But again, if you're looking for a decay, let's just say about a month later, you're looking at about $700/$800 of profit for a potential risk. Of course, it's going to be a lot higher because of just the options that we're selecting, it's about four thousand dollars.

There's just pros and cons to these things.

You look at the volatility. The Vega here is positive so that means when this sells off, you're actually making or potentially could be making some money.

Let's say volatility picks up five points here and look you'll actually be positive.

If volatility picks up, let's say fifteen points something outrageous right here, you'll be positive about $1400.

You can see that this one, you'll actually could be a little bit profitable if stocks sell off.

If you look at the butterfly here, in this example. When volatility picks up 15 percentage points and you're a month out, remember you've already got the decay, you're actually still down on the trade.

If you go to today, and let's just reset that timeframe, I will bring it back because today will be just today.

Whereas with the diagonal, in today, you'll actually be up to $1100.

You could see both of these are set up for a bullish movement but they're just spreads. They're just strategies. And I could rotate this diagonal a little bit more, if I want. I could rotate it like this and give it a little bit more room to the upside. If I think I'm a little more strong about it.

You could do many different strategies. You could do an Iron Condor even for a swing trade but again they're just pros and cons to what works for you and what doesn't. Which one has certain advantages when the market sells off? Which one has capital advantages? Which one has time advantages? That's what it comes down to in selecting your option trades for swing trading.

Yes, you could just even buy a single call or a single put but then you have a decay problem. You could do a butterfly but then you have a negative Vega. You could do a calendar but then you have a positive Vega.

Again, it's just pros and cons. They could all work for swing trading. But the one thing to keep in mind is -- if you're looking for a swing trade, make sure you give yourself ample of time or just think about the time value because options do decay.

If you get into that sweet spot, then you want to make sure you account for that. If you're doing things like diagonals. Again, you want to account for the amount that the stock will move and then that time Premium or that Theta.

So that's one thing to keep in mind. You don't want to choose option trades that are too short because if stocks are idling for 10 days, 20 days -- then you might not get or hit your strike prices or your desired price especially if you go really far out like let's say 2400 on Amazon. Well chances are, it's not gonna move 400 points in the next week or two.

Anyways, so that's the thing. You can use swing trading on any type of option spread or trade. You would just tweak them a little bit differently and that's just all about knowing and understanding, how different option spreads and trades work.

Author: Jorge Diaz

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

Join over 31,258 regular people who are bettering themselves in the stock market.

Click Here to Sign Up!

This is a community that is motivated to learn & improve their skills.
Join us and get free training lessons, freebies, and exclusive promotions.

want some helpful advice?

pay per minute coaching

I am scheduling helpful coaching sessions for people who are interested in real-world advice & guidance where you only pay per session. No long term commitment required.

Learn more
This website and content is for information purposes only as Rise2Learn, TradersFly, and Sasha Evdakov are NOT registered as a securities broker-dealer nor an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Rise2Learn, TradersFly, and Sasha Evdakov cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Rise2Learn, TradersFly, and Sasha Evdakov in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Rise2Learn, TradersFly, and Sasha Evdakov accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.