For the first year or so that I traded options, I stuck with the basics. Covered calls, Naked Puts, eventually moving on to Bull Call and Bull Put spreads, as well as Bear Put and Bear Call spreads. After some time, I also started to use more complicated option strategies, like Butterflies and Condors. If you’re not familiar with all of these strategies, here is a good overview. Over the last six months, there’s another strategy I’ve taken a liking to for making big profits- a three legged Call option strategy called the Skip Strike Butterfly.

So what is a Skip Strike Butterfly? This is a position built from three different Call options. You buy one Call option with a strike at or below the current stock price (in-the-money or at-the-money). You then sell three Call options at the next strike price above the first. Followed by buying two Call options at a strike price double the range of the first two positions.

For example, you might buy the two long positions at a strike price of 100 and 115, and sell the short position with a strike of 105.

What you end up with looks like this-

It looks a lot like a Butterfly Spread, doesn’t it? It’s essentially a small Bull Call Spread and a larger Bear Call Spread put together that overlap at the short call position. The embedded Short (Bear) Call Spread offsets the cost of the Long (Bull) Call Spread, making it possible to establish this strategy for a net credit or a relatively small net debit. However, the larger short call spread also adds more risk than with a traditional butterfly.

You would use a strategy like this when you think the stock might go up a little, but not much. You don’t want to be holding this position if the stock skyrockets. Ideally, you would open this position for a small credit. That way if the stock holds, or even drops, you still make a profit on the trade.

One way to reduce the risk on this position is to open it at a ratio of 1-2-1 instead of 1-3-2. Your initial credit is going to be a lot smaller, but the risk potential will also be smaller. You’ll also be profitable at a wider price range doing this.

Another thing to keep in mind with this strategy, it works better the less volatility there is. Index tracking stocks, like SPY, QQQ, etc., are a good one to use with this for that reason.

Do you ever use this strategy? How has it worked for you? Let me know in the comments.