In the video, “3-20 Constructing The Put BWB,” we discuss how to construct the put Broken Wing Butterfly (BWB) for smaller trading account sizes or when capital allocation is limited. We address the issue of high buying power requirement for the BWB and provide tips on choosing the optimal Days to Expiration (DTE) range and avoiding options with lower implied volatility and wide bid-ask spreads. The video explains the process of determining short and long put strikes based on risk per trade and demonstrates adjusting the strikes to achieve the desired risk and credit. The aim is to find a balance between credit received and the width of the put spread, while focusing on a defensive strategy to complement the unlimited income trading version two.
To construct the put Broken Wing Butterfly to fit your risk per trade, you need to identify the Delta for the short strikes and choose a 10-point wide spread on the credit side. Adjusting the strikes can change the width of the tent and the risk. By manipulating the strikes and finding the right balance, you can achieve a desirable credit and risk level. It’s important to consider the bid-ask spread and implied volatility when selecting options from the option chain. Remember to wait for stable prices before entering into a trade and prioritize a defensive strategy.
Constructing the Put BWB
Introduction
In this article, we will discuss how to construct the put Broken Wing Butterfly (BWB) options strategy for smaller trading account sizes or when the capital allocation is limited. This strategy allows traders to adjust the strikes to suit their risk per trade, making it more accessible for those with lower buying power requirements. We will cover various aspects of constructing the Put BWB, including choosing the optimal Days to Expiration (DTE) range, avoiding options with lower implied volatility and wide bid-ask spreads, determining the short and long put strikes based on risk per trade, adjusting strikes to achieve desired risk and credit, and the impact of changing strikes on put spread width and probability of profit. Finally, we will discuss finding a balance between credit received and the width of the tent, recommend an initial tent width of 175 for low risk per trade, and provide examples of strike changes and their impact on spread width and credit.
Choosing the Optimal Days to Expiration (DTE) Range
When constructing the Put BWB strategy, it is important to choose the optimal range for Days to Expiration (DTE) to maximize the effectiveness of the strategy. We recommend selecting a DTE range of 45 to 65 days. This range provides enough time for the strategy to play out and reduces the impact of time decay on the options. It also allows for adjustments if needed, without the options expiring too quickly. By focusing on this optimal DTE range, traders can increase the probability of success in their Put BWB trades.
Avoiding Options with Lower Implied Volatility and Wide Bid-Ask Spreads
Implied volatility and bid-ask spreads are crucial factors to consider when selecting options for the Put BWB strategy. Lower implied volatility levels indicate lower market expectations for the underlying stock’s price movement. These options may not provide sufficient premium and potential profits. Additionally, wide bid-ask spreads can result in less favorable execution prices and higher trading costs. Traders should avoid options with significantly lower implied volatility and wide bid-ask spreads to ensure efficiency and profitability in their Put BWB trades.
Determining the Short and Long Put Strikes Based on Risk per Trade
The choice of short and long put strikes in the Put BWB strategy depends on the trader’s risk per trade. The risk per trade represents the maximum potential loss if the trade goes against expectations. It is crucial to select strike prices that align with the desired risk level. Traders can calculate the risk per trade and use risk-adjusted approaches to determine suitable strike levels. By considering the risk per trade, traders can manage potential losses and align their strike selection with their risk tolerance.
Adjusting Strikes to Achieve Desired Risk and Credit
To match the risk per trade and desired credit, traders can adjust the strikes in the Put BWB strategy. This involves changing the strike prices of the short and long put options to achieve the desired risk and credit. By manipulating the strikes, traders can fine-tune their risk-reward ratio and control the potential loss and profit potential of the strategy. Adjusting strikes allows for customization of the Put BWB to meet individual trading objectives and enhance profitability.
Impact of Changing Strikes on Put Spread Width and Probability of Profit
Changing the strikes in the Put BWB strategy has a significant impact on the width of the put spread and the probability of profit. Altering the strikes affects the range of profitable outcomes and potential losses. Traders should analyze the impact of changing strikes on the width of the put spread and the probability of profit to make informed decisions. By understanding this relationship, traders can optimize their strategies and find the ideal balance between risk and reward.
Finding a Balance between Credit Received and Width of the Tent
In the Put BWB strategy, it is essential to find a balance between the credit received and the width of the tent. The credit received represents the income generated from the strategy, while the width of the tent determines the potential profit and loss range. By optimizing the credit and tent width, traders can enhance the risk-reward ratio and maximize profitability. Finding the right balance between credit received and tent width is crucial for successful implementation of the Put BWB strategy.
Initial Tent Width of 175 for Low Risk per Trade
For traders with a lower risk per trade, it is recommended to start with an initial tent width of 175. This narrower tent width is suitable for minimizing potential losses and maintaining a conservative approach. By starting with a smaller tent size, traders can limit their risk exposure while still generating income through the Put BWB strategy. This initial tent width ensures a low-risk strategy for traders with smaller trading account sizes.
Maximum Risk of $235 and Expanding the Short Put Spread
Despite starting with a smaller tent size, traders can expand the short put spread to increase their potential profit and risk exposure. By adjusting the strikes and widening the short put spread, traders can increase their maximum risk and potential return. This expansion of the short put spread allows for a more aggressive strategy and potentially higher profits. Traders should carefully consider their risk tolerance and adjust the short put spread accordingly.
Adjusting Tent Width to 172.5 for Maximum Risk of Roughly $460
To accommodate a higher risk per trade and achieve a maximum risk of approximately $460, traders can adjust the tent width to 172.5. This wider tent size allows for greater profit potential while still managing risk effectively. By adjusting the tent width based on the desired risk, traders can tailor the Put BWB strategy to their individual risk preferences while maximizing potential returns.
Recommended Strike Adjustments for Long Put Spread
To further customize the Put BWB strategy, traders can manipulate the strike prices of the long put spread. Recommended strike adjustments, such as trying 183, can help fine-tune the strategy and achieve desired risk and credit levels. Manipulating the strikes in the long put spread allows for greater flexibility in adjusting the break-even point, risk exposure, and potential profit. Traders can experiment with different strike adjustments to optimize their Put BWB trades.
Manipulating Strikes to Adjust Break-even Point and Risk
By manipulating the strikes in the Put BWB strategy, traders can adjust the break-even point and manage risk effectively. Changing the strikes allows for customization of the strategy’s risk-reward profile and can help align the trade with market conditions and personal risk tolerance. Traders should carefully consider the impact of strike changes on the break-even point and risk before implementing the Put BWB strategy.
Examples of Strike Changes and Impact on Spread Width and Credit
To illustrate the impact of strike changes on the Put BWB strategy, let’s consider a few examples. Changing strikes to 179 and 170, for instance, results in a four-point wide spread and a credit of approximately $25. These strike adjustments affect the spread width and the income potential of the strategy. Traders should review and analyze these examples to gain insights into strike adjustments and their impact on spread width and credit in the Put BWB strategy.
Starting with Desired Risk per Trade and Adjusting Short Put Spread Width
To construct the Put BWB strategy effectively, traders should start with the desired risk per trade and adjust the width of the short put spread accordingly. By aligning the trade with the desired risk level, traders can optimize profitability and ensure risk management. Starting with the desired risk per trade establishes a solid foundation for the strategy and allows for efficient risk-reward analysis.
Conclusion
Constructing the put Broken Wing Butterfly (BWB) options strategy requires careful consideration of various factors, including the optimal DTE range, implied volatility, bid-ask spreads, strike selection, and adjustments. Traders can fine-tune the strategy by manipulating strikes, adjusting the width of the tent, and balancing credit received and risk exposure. By following the guidelines outlined in this article, traders can successfully construct the Put BWB strategy and improve their trading outcomes. It is crucial to understand the relationship between strike changes, risk, and profitability to effectively manage the strategy.