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This morning I closed three winners and refused to touch a fourth. By noon, I had a 247% gain, a 170% gain, and a 123% gain locked in, with another butterfly sitting at 100% that I won't touch. |
This Friday wrapped up what I'm calling "The Week of the Fly." Four out of five butterflies hit this week, and this morning everything aligned exactly like my framework predicted it would. |
But it started Monday with Dell ripping my face off. |
When Simple Beats Smart |
Dell was supposed to suck - it always sucks. I threw on a bearish butterfly because, well, Dell sucks. Apparently they figured something out over there. A two-standard-deviation move that obliterated my setup. |
Then the earnings flips started hitting. |
CoreWeave at $0.72 expecting about a $16 move. The market delivered exactly that - moved 16 bucks like clockwork. But for a moment, it moved beyond that and hit my butterfly's sweet spot. Exit at $2.50: 247% gain. |
Add in the BIDU earnings flip that hit for 170% before noon, and my Netflix call spread at 94 cents that exploded to $2.07 when they walked away from their Warner Brothers bidding war - a 123% winner before 10 AM. |
"That ain't bad," I told the TheoTrade Chatroom. "That at least covers the cost of a couple crappy ones I've had." |
And that's the point everyone misses. |
These winners didn't just print money - they covered Dell's miss and funded my next round of setups. When you're running proper allocation across multiple butterflies, you don't need to be right every time. You need the winners to more than cover the losers. |
The Netflix Auction |
The Netflix trade taught me something about market psychology in real-time. |
This was an out-of-the-money swing where I wanted 100% or better. When Netflix walked away from their bidding war with Warner Brothers, the call spread exploded. |
But here's what made this trade beautiful: Netflix just stuffed Warner Brothers in the most brutal way possible. |
Ever been to an auction where someone announces "I want that item, I'll pay whatever it takes"? That's when you hold your paddle up and never put it down. You run the price up mercilessly, then drop out right when they think they've won. |
Netflix just did that on a corporate scale. They made Paramount overpay while preserving their own capital. The market rewarded that discipline immediately. |
The Decision That's Killing Me |
But the trade testing every principle I teach is sitting right in front of me: the SPX butterfly. |
It's up 100% as I write this. Every fiber in my being says take the money. Lock in the winner. End this week perfectly. |
I won't do it. |
Not because I'm greedy. Because I've hit 1300% gains on butterflies before. Once you've experienced that level of profit, 100% feels like settling. |
But more importantly, the math still supports holding. |
This morning's volatility is telling me something the S&P isn't showing yet. VIX is running higher than it should be for where we're trading. My SPX butterfly has a 40% probability of touching the long strike. There's a 25% chance of hitting the center strike where the real money lives. |
When you've got those odds and the market is showing you unusual vol structure, you don't exit because you're up 100%. You exit when the probability changes or you hit your target. |
Most traders get this backward. They take profits when they feel good and hold losers when they feel bad. The framework works in reverse: hold winners when the math supports it, cut losers when the probability shifts. |
What Actually Matters |
People always ask what makes butterfly trading work. They want some complex volatility model or insider knowledge. |
It's not that complicated. You figure out the expected move. |
And then treat each trade as part of a larger system. You stay disciplined about entries and exits. You don't let individual results override the process. |
This morning I locked in several winners and I'm holding one more that's testing my conviction. Next week I might miss three in a row. The approach stays the same. |
Allocation trumps accuracy. When probability supports conviction, comfort becomes the enemy. Simple setups often work better than complex analysis. |
The Week of the Fly is ending exactly right: profits locked where probability shifted in my favor, risk maintained where the math still supports the position. |
Sometimes that means walking away from money sitting right in front of you. |
And sometimes that's the hardest decision of all. |
To your success, |
Don Kaufman |
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P.S. Several of my winning butterflies this week came from using my earnings flips strategy, click here to learn more. |
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