Do you already know the butterfly strategy, or in Portuguese, butterfly strategy for the stock market? We know how profitable the stock market can be and how there are opportunities for really advantageous gains in this segment.
However, we also know the risk and how a deal can end up being a real “backfire”. The butterfly strategy is a good way of trying to avoid greater risks when entering the stock market and getting some bonds at a nice price without the risk of losing large capital.
Let’s get to know more closely how butterfly strategy works and what this practice consists of.
What this article covers:
What is Butterfly?
There is a market that derives from the stock market, it is called the options market, it also receives the name derivative due to its nature. This options market consists of buying not the security itself, but the future possibility of acquiring a security. By carrying out this type of purchase, the investor is guaranteeing that he will buy the shares at a “frozen” price.
The same goes for the seller, who sells the shares at an agreed upon price. The butterfly strategy is carried out exactly to further reduce the risks of this type of investment or sale.
With the butterfly strategy you can insure yourself twice in the stock market and thus avoid capital loss.
How does Butterfly work?
We have already explained what the butterfly strategy area of activity is, but now let’s understand even more about how it works.
Let’s say you’re an investor ready to buy an option that’s on sale. You take the trade, but to protect yourself from the volatile nature of the stock, at the time you buy the derivative market option, you also sell two other options at an average price.
So let’s say you bought an option worth R$ 100.00, to practice the butterfly strategy you will also sell two other options with an approximate value. But not only that! The options you will sell will have an up and down margin. In this hypothetical scenario above, the options that would be purchased would have a value of approximately R$90.00 and R$110.00, respectively. Thus, at least an average value you will receive.
Using the butterfly strategy you are being as conservative as possible with your finances, this means less loss but also less profit. Still, when carried out effectively and successfully, the butterfly strategy can yield some profit in return, however small.
Profiting with the butterfly strategy is indeed possible, but we can never expect exorbitant profits using this way of trading stocks. But if your analysis of the financial market is correct and the application of the butterfly strategy is done with care and care, the profit will come.
What are Butterfly’s strategies?
As we mentioned, the butterfly strategy consists of selling two shares at a price similar to the purchased shares, but with the sale price being up and down. In fact, there are other methods of carrying out the butterfly strategy, for example in the case of sales.
The butterfly strategy in the case of sales would be exactly the same thing, but done in reverse. In this case, the subject would be selling the shares and then buying two others.
How to apply?
The butterfly strategy is great to be applied by the most conservative, pragmatic investors and also for beginners! All you need is access to a brokerage that offers sales and purchases in the options market, or derivatives, and apply the strategy.
Using the butterfly strategy is very welcome for beginners and for those who cannot handle their capital so freely, so use it and abuse it in these situations.