Dear Jim: thanks for your question. It is good to have other eyes looking over your strategies. I could not realistically respond sooner as I just returned a few days ago from an international trip to eastern Europe and I'm unpacking.
I had started my position with a long debit call vertical (bullish). When the market moved up, I could have simply closed out with a profit. However by buying the long put debit vertical, the new position was a box. The point I was trying to make is that from that position, I could adjust either the call or put side into a butterfly (without losing my locked in profit from the box), and without having to predict market direction. By selling a credit vertical against either debit vertical, I would increase my profit significantly, add no additional risk, and not have to be right on market direction. When you think about that, that is pretty significant.
Another way to look at this: I bought a debit call vertical. It became profitable. So I could simply sell the higher call vertical for a credit to lock in a butterfly at a net credit. If you can lock in butterflies for credits, consistently, you'll do very well at options. I believe this is why Charles Cottle insists on traders knowing the synthetics and the locking positions real well (conversion, reversal, box)......Joel
PS> there is a good article in Traders magazine where Cottle discusses how he boxed off several positions that started as verticals. If you google Cottle AAPL you will probably find it. Otherwise I will try to post the link or the PDF document itself.
PPS> there is another article by Philip Halperin in which he discusses a technique for locking in butterflies at credits.
PPPS> look for my previous message on the GOOG BWB for yet another way to lock in butterflies for credits. This is very realistic and do-able.
--- In OptionClub@yahoogroups.com, "Jim Ranum" <amt2100@...> wrote:
>
> Hi Joel,
>
>
>
> Mind if I ask a question about this old post you did on a Box?
>
> I follow everything up to the point you said:
>
> Once I have the box on, if market moves higher I could sell the 115 116 call vertical (sell 115 long 116) for a credit of .44 which would leave me with a fly at a net credit of .21 +.44 or .65.
>
>
>
> If you sell the 115/116 vertical, how would you have a fly? Wouldn’t you just have the Put vertical left? If the price is higher and all you have left is your Bear Put, aren’t you at -.49 + .44 = -.05 ?
>
> I’m missing how you get a fly out of this.
>
>
>
> Thanks for revisiting this.
>
> Jim
>
> _____
>
> From: comedynight2000 <comedynight2000@...>
> To: OptionClub@yahoogroups.com
> Sent: Mon, January 18, 2010 4:24:59 PM
> Subject: [TheOptionClub.com] Re: Adjusting Bear Call Spread
>
>
> OK, I'll explain the box in reference to a position I currently have and show values of nearby verticals so you can get a feel for how these adjustments work. I'll use Friday's closing prices though of course they will change tomorrow morning.
>
> I am long the SPY 114 115 call vertical (long 114 call short 115 call)which I opened a few days ago for a net debit of 0.29. Current value about .50, so I could close for a profit of .21.
>
> If unsure of direction, I could buy the 115 114 put vertical (long 115 put short 114 put for a net debit of about .49.
>
> At expiration the box must be worth the difference in strikes of 1.00 leaving a net profit of about 1 minus cost of call vertical and put vertical or 1-.29-.49 or .22 which closely matches my profit mentioned earlier of .21, in other words locking in that profit.
>
> Once I have the box on, if market moves higher I could sell the 115 116 call vertical (sell 115 long 116) for a credit of .44 which would leave me with a fly at a net credit of .21 +.44 or .65.
>
> Or, once box is on, and market moves lower i can sell the 114 113 put vertical (sell 114 put buy 113 put for a net credit of .44 also and again an adjusted fly is left with a net credit of .65.
> My point being that buying that put vertical to create the box allows me to lock in a current profit and adjust up or down from there.
>
> Also I need to correct my previous post. I meant to say that the 113 call could be bought and the 115 call sold resulting in long the 113 short 114 call or a bullish call vertical.... I hope this helps...Joel
>
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