Risk and reward are the most important things to understand in any kind of trading. If a trader does not understand how to set up good reward to risk setups they can never be successful in the long run. Not only does a trader need to master risk management to trade successfully they also need to master the concept of minimum acceptable reward. A trader will determine how much potential reward is the bare minimum they are willing to accept for the risk they are taking on. In options trading it is much easier to set up trades with huge reward to risk ratios so a trader looking to increase their potential return per unit of risk needs to consider trading some of the more complex options strategies available. In this piece we will go over an example of one such strategy that a trader can use ahead of earnings announcements. We will discuss one strategy know as a “ butterfly spread ” and how a trader can set it up ahead of earnings while giving themselves the potential for a large return on a small amount of risk.
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