So far in this new M21 options training series, we have set the parameters for success with two guidelines:

• One trade does not fit all: Multiple strategies in your options trading plan is a must, to correctly allocate capital for different market conditions.
• Market conditions will change: The strategies can be used as stand-alone systems but to gain the status of professional options trader, our toolbox of strategies should be used as building blocks to a comprehensive system.

Your higher purpose is to understand how various options configurations react to price movement, volatility changes and the passage of time in order to know the best time to use each configuration.

Today we take a look at one of the strategies taught in the M21 system:

The Bearish Butterfly takes the advantages of directional trading and combines them with the advantages of high probability income trading to create a high probability, high yield, positive Theta trading system.

Some things I love most about the strategy are that there is no searching for stocks, no need to pick direction, no need to perfectly time the market and no need to sit in front of the computer all day.

The Bearish Butterfly works exceptionally well in high volatility markets, down trending markets and sideways markets. It is more challenging to trade, but often does very well, in certain types of up trending markets as well. This is because the trade can withstand a substantial move against the position.

Does this mean the trade always wins? Of course not, no trading system wins all the time.

But it does give the position a higher probability of winning than wide iron condors while maintaining a much better risk reward profile.

Benefits of the Bearish Butterfly:

• High probability, high-yield trading system that adapts well to a large variety of market conditions.
• Low risk entries that scale into new positions behind the market price as the asset price rises.
• Produces the highest returns in sideways markets, when most directional strategies perform poorly.

Advantages of the Bearish Butterfly over Iron Condors

Wide Iron Condor strategies can often handle a large range of price movement, however, that is at the expense of taking on tremendous amounts of risk for a small amount of maximum gain.

This means a larger than expected loss on a single iron condor trade can sometimes take out up to a years’ worth of returns.

The BB can handle as large of a range of price movement as wide iron condors in many market environments, however, it has a much higher potential gain. This is accomplished by the unique trade management system we apply.

Advantages of Bearish Butterfly versus Bearish Verticals

A common strategy when the market is over-extended is selling a bearish vertical. Low implied volatility in this situation results in a vertical with a low profit potential that often gets stopped out quickly with a small price movement against the position.

The Bearish Butterfly can be used in this situation to create a position with much more profit potential that can withstand a substantial move in the wrong direction.

The primary objective of the Bearish Butterfly is to maximize returns in volatile and bearish market conditions.

This allows you to drastically improve results when most positive Theta trades and long positions struggle.

All the best John Locke.