I understand it like this:
You should have $5000 for every "one" of these you want to trade. It generally costs me less than $2000 to get into the trade if you get in when he says to get in (about 50 days away from expiration). The closer you get to expiration, the more expensive these become.
The rest is in reserve in case you have to adjust.
No, one would never lose the entire $5000 (per butterfly), and I doubt very much if you'd even ever have $5,000 at risk (again, per butterfly...). Like I said, usually, I have less than $2,000 at risk at any time (per butterfly spread).
Plus, the rules state you are to look to exit the trade if you are down $500 or more, and you look to exit the trade if you are up $500 or more. You are also to exit the trade if there are only 20 days to expiration or less....if you were trading more than one butterfly spread (say you had $20,000 and you were trading 4 of these each time, then you would look to exit with either a $2,000 loss or $2,000 profit).
I have never had to make more than one adjustment thus far, and I've been trading these since around January....
This is a rather boring and slow way to trade...it's not something you have to monitor throughout the day...maybe take a look once at the start of the day and once at the end...they say you've made it as a trader once things get boring...
