Friday, June 5, 2009

Re: [TheOptionClub.com] Re: how do I analize butterfloies?



Paul,

Is it possible for you to share an example?

Akram

On Fri, Jun 5, 2009 at 10:39 AM, thecthing <theCthing@yahoo.com> wrote:


--- In OptionClub@yahoogroups.com, "paul7313" <paul7313@...> wrote:
>
> butterfly; sell 2 qqqq calls at 37
> buy 1 qqqq call at 47
> buy 1 qqqq call at 27
>
> what happens if the market goes up, stays the same, goes down?
>
> I think butterflies are better than straddles
>
Here is a simple method: First, at any given price for the underlying, there are two points beyond which you will not make any money at expiration. Calculate the two prices for the underlying at which the expected return at expiration is zero. The only information you need to do this is the price you paid for the fly. Second, "ratchet in" your profit points on good days, and leave them alone on bad days. For example, suppose you paid $X for the fly, and can now receive a larger amount, $Y for it. Your total profit is Y minus X. Subtract this profit from your upper "uncle point" and add it to your lower "uncle point" giving you a new, narrower, profit range for the trade. Third, when the underlying hits one of your uncle points, either get out or adjust that side of the trade. Fourth, exit at 10-20 days prior to expiration to avoid getting whacked around by gamma. Making a spreadsheet that does all this for you and updating it daily is an excellent exercise. If you do that, you will truly understand these trades.

These are just some simple rules. I have done hundreds of these wide flies and have that they work very well most of the time and require a minimal investment of time (a few minutes each day to update the spreadsheet). I get good execution on liquid underlyings like your qqqq--better than a condor since two of the options are ATM. You can jazz these up by selecting opportune entry and exit times, doing fancy adjustments, changing the frequency with which you update your parameters, taking partial profits, etc.


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