For this Education Monday installment, Brian Overby sets the live trading aside to walk through, slide by slide, one of the more advanced structures in his own Options Playbook: the skip strike butterfly, using a real trade the show placed in Dell around its earnings report as the worked example. He builds up to it in layers, which is what makes the episode useful as a standalone lesson even for anyone who’s never seen a butterfly before. A standard call butterfly, he explains, is a buy-one, sell-two, buy-one structure for a net debit, with a defined and known maximum loss and a payout that peaks if the stock parks exactly at the middle strike by expiration. A short call spread, separately, is a bet that a stock stays flat or falls, selling a closer-to-the-money call and buying a further one for protection, collecting a net credit with a high probability of success but a capped, asymmetric risk-reward. The skip strike butterfly, as he lays it out, is what happens when you combine the two: instead of a normal butterfly’s middle strike being bought and sold at the same price (which nets to nothing), you skip that shared strike entirely, and the layered short-call-spread economics let the whole structure be built for a net credit rather than the debit a normal butterfly requires. The result behaves a bit like a hedged, reduced-risk version of a short call spread: it profits modestly if the stock falls or stays flat, profits more if it rises moderately, and only turns into a real loser if the stock blows well past the skipped strike. Overby is upfront about the catch: the whole trade depends on time decay working in its favor, and it works best over a very short window, which is exactly why earnings season is the natural home for it. Elevated implied volatility around an earnings date inflates the premium available to sell, which is what makes the net credit possible in the first place. He then walks through the actual Dell trade in full: with the stock at $461.23 and only three trading days left before that week’s expiration (Dell announced after the close on a Tuesday, leaving Wednesday through Friday), the show bought the 520 call, sold two of the 525 calls, skipped the 530 strike entirely, and bought the 535 call, all for a net credit of 50 cents. That works out to $450 of defined risk against a maximum possible gain of $550 if Dell settled exactly at 525 by Friday’s close, an 11% return on risk targeted inside a three-day window. He notes a viewer who executed the same trade live during the original broadcast actually got filled at 59 cents, a slightly better price than the show’s own numbers. He closes with a practical extension of the idea: because more liquid names now list daily and weekly expirations, this same short-fuse, high-implied-volatility structure can be built around almost any earnings date, not just the handful of stocks that happen to report right before a standard weekly options expiration, and reiterates that the whole strategy only works when there’s enough volatility around to actually fund the butterfly. |
