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Strategies & Market Trends : Advanced Option Strategies -- Ignore unavailable to you. Want to Upgrade?

To: Joe Waynick who wrote (200)	9/8/1998 10:28:00 AM
From: AurumRabosa	Read Replies (1) \| Respond to of 355

Joe, Nice to meet you too. If the stock moves away from the center strike, either up or down, then the butterfly will equal the value of the wings, which using my DELL example is given by: Wings (per share) = -C(105) + 2C(110) - C(115) - 4F/100 where C is the purchase or sale price of the Call and F is the commission per leg, which must be low or this is not going to work. In the case of the long call butterfly if the stock drops below 110 then you won't get called and if it rises above 110 then you get called at 110 but sell your calls to pay for any difference and still might net something. At 110 the value of the butterfly peaks and is given by: Peak (per share) = -C(105) + 2C(110) - C(115) - 4F/100 + S - 105 where S is the stock price. The PL graph has the shape of a triangle between 105-110-115 and a pair of horizontal lines (wings) below 105 and above 115. So if you just scan some very liquid option chains and look plus and minus one strike of the underlying stock price, which needs to be at a strike, and look for low value wings with a reasonable value peak then you may have a candidate butterfly. Is anyone scanning for these spread trades? I don't think really attractive butterflys come along too often, and they don't hang around very long either, so tread lightly. Take a look at INTC as a butterfly candidate and you'll see that it's a terrible idea and almost certain to loose money. Your concern for safety is the best reason to learn spread trading. But, if you haven't done your homework and have total confidence you understand the trade then don't take it, another'll be along in a few minutes anyway. What would the leverage on this trade be?