Stock Market Options Trading
Credit Spreads Vs. Butterflies
Oct 5, 2023
The podcast compares credit spreads vs butterflies in a recent trade, discussing market situations, risk-rewards, and probabilities. Both trades would've worked, but one had more risk. Topics include market responses to strong job numbers, risk-defined shorting strategies, credit spreads, butterfly spreads, and analyzing risk and reward in options trading strategies.
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Quick takeaways
- Credit spreads offer higher probability but more risk, while butterflies present lower probability with higher rewards based on market outlook and risk tolerance.
- In bearish market conditions, using credit spreads or butterflies can provide short exposure in a risk-defined manner, with credit spreads offering negative delta and time decay advantages, and butterflies requiring market movement for profitability.
Deep dives
Comparison Between Butterfly Spread and Credit Spread
When deciding between a butterfly spread and a credit spread in a trading scenario, considerations such as market outlook, risk-reward ratio, and probability play crucial roles. The credit spread offers a higher probability of success but comes with increased risk and capital requirement. On the other hand, the butterfly spread presents a lower probability trade with higher rewards, particularly if there is momentum in the market. Understanding these differences allows traders to choose based on their market outlook and risk tolerance.
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