Directional Butterflies, French Physiologists and Bending Spoons with Your Mind

I can read minds. OK. Not really. But, hey, wouldn’t some of that sixth sense stuff be great as a trader?

I actually traded with a guy on the CBOE trading floor who said he could bend spoons with his mind. True story. I never saw him do it, and let’s just say I had my doubts. But he swore he could.

Anyway, I feel like I can almost read minds in one regard: reconstructing the rationale for why someone may have made a trade.

Wing Spreads

You’re probably already familiar with our Credit Spread Genius and Time Spread Genius trade trigger systems. Well, those work so well that I’m expanding the family with Wing Spread Genius (soon).

I’ve got the prototype ready and have been testing it by looking at the trades the model sends out.

Just like the credit spread and time spread versions of the Genius namesake, it’s built to scour the market for the best candidates of a very specific type of trade—direction-neutral income trades. And it spit out those trades but also some other types I did not expect.

It was French physiologist Claude Bernard who said, “It is what we know already that often prevents us from learning.”

I know butterflies, iron butterflies, condors and iron condors like I know my birthday. I’ve traded them for years. But I underappreciated the directional prowess these trade setups have.

Johnnycat from Group Coaching is a pro with directional butterflies. But it wasn’t until I saw some of these hit the scanner that I really started to appreciate them for all they are worth—and learned that a LOT of professional traders use them all the time.

NVDA Directional Butterfly

On Thursday, midday, this trade hit the Wing Spread Genius test account:


And here’s the chart of NVDA over the past 6 months:


It’s been climbing straight up for over two months. At that point, what was the likelihood of it heading higher to close out the week positive? Probably pretty good, BUT…

Unemployment was the following day. And there’s been a smattering of voices expressing concern or even downright bearishness lately. This was a case for a reasonable bet to the upside but necessitating very low risk in the case of being wrong.

Here on this trade, the trader risked $440 max loss. But if he or she was right and NVDA rallied along its recent trajection, the trader could stand to make massively more. Perfect case scenario, the max profit could be $9,560.

To be fair, with butterflies—directional or not—traders aren’t looking for the max profit. But just close. It had a roughly 2% range in which it would be profitable between $245.11 and $249.89.

This trader made a bet that maybe placed the odds somewhat against him or her, but the risk reward more than balanced out the likelihood of success. Win, lose or draw, this was a very smart trade right out of the gate.

And this is why I’ve come to join the likes of other super smart traders like John who love directional butterflies.

Dan Passarelli
Founder and President
Market Taker Mentoring, Inc.

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