Disclaimers. Butterflies and Adjustments 11/28/2012

Transcription

1 Butterflies and Adjustments Disclaimers Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at (877) 495-KING visiting or by downloading the file from the recourses tab on your screen. System response and access times may vary due to market conditions, system performance, and other factors. Margin trading involves risks and is not suitable for all accounts. Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as a recommendation, or solicitation to buy or sell securities. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. 2 1

2 Disclaimers Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor. While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct. The Greeks (Delta, Gamma, Theta, Vega, Rho) represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct. The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. TradeKing is a member of FINRA and SIPC. 3 Butterflies and Adjustments Basics 2

3 Butterfly Set-Up XYZ factitious with 43 days to expiration Long Spread $6.25 Buy 1 Sep 185 XYZ 8.95 Sell 1 Sep 190 XYZ 5.95 Short Spread $6.25 Sell 1 Sep 190 XYZ 5.95 Buy 1 Sep 195 XYZ net credit Max Risk Long Spread: paid = 3.00 Short Spread: difference between strikes (5), minus the net credit received = Butterfly Set-Up XYZ factitious with 43 days to expiration Long Spread $6.25 Buy 1 Sep 185 XYZ 8.95 Sell 1 Sep 190 XYZ 5.95 Short Spread $6.25 Sell 1 Sep 190 XYZ 5.95 Buy 1 Sep 195 XYZ net credit Butterfly.65 Max Risk Long Spread: paid = 3.00 Short Spread: difference between strikes (5), minus the net credit received =

4 Standard Butterfly XYZ factitious with 43 days to expiration Buy 1 Sep 185 XYZ 8.95 Sell 2 Sep 190 XYZ 5.95 Buy 1 Sep 195 XYZ 3.60 At Expiration: Max Risk =.65 Max Gain = = Break-Evens = and Mid point.65 $ Butterfly Profit & Loss Graph Buy 1 Sep 185 Call Sell 2 Sep 190 Call Buy 1 Sep 195 Call Mid point.65 3 Profit & Loss Stock Price at Expiration 8 4

5 Butterfly Question With the Stock at 42.50, estimate the call butterfly value at various times prior to expiration and chart them on the graph below $250 $250 $200 Butterfly Value $150 $100 $50 $35 $37 $40 $45 $50 $59 $ Exp. Days to Expiration Butterfly Strategy : Setup, Risks, and Uses The Strategy 5

6 Strategy Concept Friday 4/27: Start with O-T-M Put B-Fly on (Weeklys) SPX at 1, VIX at Buy 1 SPXW May Sell 2 SPXW May Buy 1 SPXW May Max Risk: 3.15 or $315 plus comm. Monday? Market Up: Market Down: Market Unchanged: Net Debit 3.15 $9.00 Convert to 1 or 2 Short Put Spds Maybe close double? Stay the course 11 Managing B-fly Market Up Initially: Long one 1400/1380/1360 Put B-Fly Put Put Put Managing Action: Sell one 1400/1360 Put Spread Put Put New Position: Short two 1380/1360 Put Spreads Put Put Tuesday 5/1: SPX at up 7.91 for the day BTO 1 SPXW May STC 1 SPXW May Max Risk now $4,000 Net Credit 5.40 $7.00 6

7 Managing B-fly Market Up New Position Long 2 SPXW May Put Short 2 SPXW May Put Margin Required $4,000 - max loss Total Net Credit on all trades 2.25 Total s $16.00 Put stop loss order in place right away. Never want to lose more in one week than the goal for your max gain in a week - if you can avoid it! Will not help with market gap on open or halted stock. Where would you like to close this if market continues up? Maybe hope it expires worthless? Pay attention to news - Jobs report Friday 5/4 before open Managing B-fly Market Up Later in Week Initially: Long one 1400/1380/1360 Put B-Fly Put Put Put Managing Action: Sell one 1400/1380 Put Spread Put Put New Position: Short one 1380/1360 Put Spread Put Put Maybe if Wednesday or Thursday we do the following: BTC 1 SPXW May Put Net credit will probably be less than other roll, but less STC 1 SPXW May Put overall market risk. Max Risk now $2,000 $7.00 7

8 Managing B-fly Market Up Later in the Week Long 1 SPXW May Put Short 1 SPXW May Put Margin Required $2,000 - max loss Total Net Credit??? Total s $16.00 Once again make sure you have your upside and downside targets in place. Do this if the 1360 put is cheap relative to 1340 put if early in the week it won t be. The 1340 put would be trading for pennies most likely. Ultimately your decision on what roll you want to do. Managing B-fly Way Down Around Low Strike Initially: Long one 1400/1380/1360 Put B-Fly Put Put Put Managing Action: Buy one 1400/1360 Put Spread Put Put New Position: Long two 1380/1360 Put Spreads Put Put If had a profit, but waited too long to take it or a big gap down on open. BTO 1 SPXW May Put STC 1 SPXW May Put Max Risk now total debit paid Net debit paid for butterfly and long spread, but worth 4k if below 1380 at Exp. $7.00 8

9 Managing B-fly Market Down Big Long 2 SPXW May Put Short 2 SPXW May Put Max loss is the total paid Total Net Debit??? Total s $16.00 Once again make sure you have your upside and downside targets in place. Now we need the market to stay below Phone Numbers: (877) 495-KING s: webinars@tradeking.com theoptionsguy@tradeking.com Brian s Blog: The Options Guy TradeKing s Trader Network: Check out OptionsPlaybook.com Today! Social Networks: Twitter.com/TradeKing Twitter.com/BrianOverby Youtube.com/TradeKing Facebook.com/TradeKing 9