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Postby PebbleTrader » Thu Feb 28, 2013 6:08 pm

"Well that chart is the typical chart for the results at expiration. IN the mean time the options will have a current value that can put you in profits even when you are still in the middle."

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Postby PebbleTrader » Thu Feb 28, 2013 7:17 pm

Long Butterfly Spread W/Calls

Image

The Setup:

-Buy a call, strike price A
-Sell two calls, strike price B
-Buy a call, strike price C
-Generally, the stock will be at strike B

NOTE: Strike prices are equidistant, and all options have the same
expiration month.

Break-even At Expiration

There are two break-even points for this play:

-Strike A plus the net debit paid.
-Strike C minus the net debit paid.

Maximum Potential Profit

Potential profit is limited to strike B minus strike A minus the net debit paid.

Maximum Potential Loss

Risk is limited to the net debit paid.

As Time Goes By

For this strategy, time decay is your friend. Ideally, you want all options
except the call with strike A to expire worthless with the stock precisely at
strike B.

Implied Volatility

After the strategy is established, the effect of implied volatility depends on
where the stock is relative to your strike prices.

If your forecast was correct and the stock price is at or around strike B,
you want volatility to decrease. Your main concern is the two options you
sold at strike B. A decrease in implied volatility will cause those near-the-
money options to decrease in value, thereby increasing the overall value of
the butterfly. In addition, you want the stock price to remain stable around
strike B, and a decrease in implied volatility suggests that may be the
case.

If your forecast was incorrect and the stock price is approaching or outside
of strike A or C, in general you want volatility to increase, especially as
expiration approaches. An increase in volatility will increase the value of
the option you own at the near-the-money strike, while having less effect
on the short options at strike B, thereby increasing the overall value of the
butterfly.



A long call butterfly spread is a combination of a long call spread and a
short call spread, with the spreads converging at strike price B.

Ideally, you want the calls with strikes B and C to expire worthless while
capturing the intrinsic value of the in-the-money call with strike A.

Because you're selling the two options with strike B, butterflies are a
relatively low-cost strategy. So the risk vs. reward can be tempting.
However, the odds of hitting the sweet spot are fairly low.

Constructing your butterfly spread with strike B slightly in-the-money or
slightly out-of-the-money may make it a bit less expensive to run. This will
put a directional bias on the trade. If strike B is higher than the stock price,
this would be considered a bullish trade. If strike B is below the stock price,
it would be a bearish trade. (But for simplicity's sake, if bearish, puts would
usually be used to construct the spread.)
Last edited by PebbleTrader on Thu Feb 28, 2013 7:40 pm, edited 1 time in total.
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Postby PebbleTrader » Thu Feb 28, 2013 7:22 pm

Long Butterfly Spread W/Puts is the same except you are using puts instead of calls like in the previous example...
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Postby PebbleTrader » Thu Feb 28, 2013 7:24 pm

-----------------------------------------------------------------------------------------
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Postby PebbleTrader » Thu Feb 28, 2013 7:25 pm

Long Condor Spread W/Calls

Image

The Setup:

-Buy a call, strike price A
-Sell a call, strike price B
-Sell a call, strike price C
-Buy a call, strike price D
-Generally, the stock will be between strike price B and strike price C

Break-even At Expiration

There are two break-even points:

-Strike A plus the net debit paid
-Strike D minus the net debit paid

Maximum Potential Profit:

Potential profit is limited to strike B minus strike A minus the net debit paid.

Maximum Potential Loss:

Risk is limited to the net debit paid to establish the condor.

As Time Goes By

For this strategy, time decay is your friend. Ideally, you want the options
with strike C and strike D to expire worthless, and the options with strike A
and strike B to retain their intrinsic values.

Implied Volatility

After the strategy is established, the effect of implied volatility depends on
where the stock is relative to your strike prices.

If the stock is near or between strikes B and C, you want volatility to
decrease. Your main concern is the two options you sold at those strikes. A
decrease in implied volatility will cause those options to decrease in value,
thereby increasing the overall value of the condor. In addition, you want
the stock price to remain stable, and a decrease in implied volatility
suggests that may be the case.

If the stock price is approaching or outside strike A or D, in general you
want volatility to increase. An increase in volatility will increase the value of
the option you own at the near-the-money strike, while having less effect
on the short options at strikes B and C.



You can think of a long condor spread with calls as simultaneously running
an in-the-money long call spread and an out-of-the-money short call
spread. Ideally, you want the short call spread to expire worthless, while
the long call spread achieves its maximum value with strikes A and B in-
the-money.

Typically, the stock will be halfway between strike B and strike C when you
construct your spread. If the stock is not in the center at initiation, the
strategy will be either bullish or bearish.

The distance between strikes A and B is usually the same as the distance
between strikes C and D. However, the distance between strikes B and C
may vary to give you a wider sweet spot.

You want the stock price to end up somewhere between strike B and strike
C at expiration. Condor spreads have a wider sweet spot than the
butterflies. But (as always) there's a tradeoff. In this case, it's that your
potential profit is lower.
Last edited by PebbleTrader on Thu Feb 28, 2013 7:36 pm, edited 1 time in total.
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Postby PebbleTrader » Thu Feb 28, 2013 7:25 pm

Long Condor Spread W/Puts is the same except you are using puts instead of calls like in the previous example...
Last edited by PebbleTrader on Thu Feb 28, 2013 7:42 pm, edited 1 time in total.
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Postby PebbleTrader » Thu Feb 28, 2013 7:25 pm

----------------------------------------------------------------------------------------
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Postby PebbleTrader » Thu Feb 28, 2013 7:46 pm

Collar

Image

The Setup:

-You own the stock
-Buy a put, strike price A
-Sell a call, strike price B
-Generally, the stock price will be between strikes A and B

Break-even At Expiration

From the point the collar is established, there are two break-even points:

-If established for a net credit, the break-even is current stock price minus
net credit received.

-If established for a net debit, the break-even is current stock price plus
the net debit paid.

Maximum Potential Profit:

From the point the collar is established, potential profit is limited to strike B
minus current stock price minus the net debit paid, or plus net credit
received.

Maximum Potential Loss:

From the point the collar is established, risk is limited to the current stock
price minus strike A plus the net debit paid, or minus the net credit
received.

As Time Goes By

For this strategy, the net effect of time decay is somewhat neutral. It will
erode the value of the option you bought (bad) but it will also erode the
value of the option you sold (good).

Implied Volatility

After the strategy is established, the net effect of an increase in implied
volatility is somewhat neutral. The option you sold will increase in value
(bad), but it will also increase the value of the option you bought (good).



Buying the put gives you the right to sell the stock at strike price A.
Because you've also sold the call, you'll be obligated to sell the stock at
strike price B if the option is assigned.

You can think of a collar as simultaneously running a protective put and a
covered call. Some investors think this is a sexy trade because the
covered call helps to pay for the protective put. So you've limited the
downside on the stock for less than it would cost to buy a put alone, but
there's a tradeoff.

The call you sell caps the upside. If the stock has exceeded strike B by
expiration, it will most likely be called away. So you must be willing to sell
it at that price.
Last edited by PebbleTrader on Thu Feb 28, 2013 7:52 pm, edited 1 time in total.
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Postby PebbleTrader » Thu Feb 28, 2013 7:46 pm

------------------------------------------------------------------------------------------
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Postby PebbleTrader » Thu Feb 28, 2013 8:00 pm

Iron Condor

Image

The Setup:

-Buy a put, strike A
-Sell a put, strike B
-Sell a call, strike C
-Buy a call, strike D
-Generally, the stock will be between strike price B and strike price C

Break-even At Expiration

There are two break-even points:

-Strike B minus the net credit received.
-Strike C plus the net credit received.

Maximum Potential Profit:

Profit is limited to the net credit received.

Maximum Potential Loss:

Risk is limited to strike B minus strike A, minus the net credit received.

As Time Goes By

For this strategy, time decay is your friend. You want all four options to
expire worthless.

Implied Volatility

After the strategy is established, the effect of implied volatility depends on
where the stock is relative to your strike prices.

If the stock is near or between strikes B and C, you want volatility to
decrease. This will decrease the value of all of the options, and ideally,
you'd like the iron condor to expire worthless. In addition, you want the
stock price to remain stable, and a decrease in implied volatility suggests
that may be the case.

If the stock price is approaching or outside strike A or D, in general you
want volatility to increase. An increase in volatility will increase the value of
the option you own at the near-the-money strike, while having less effect
on the short options at strikes B and C. So the overall value of the iron
condor will decrease, making it less expensive to close your position.




You can think of this strategy as simultaneously running an out-of-the-
money short put spread and an out-of-the-money short call spread. Some
investors consider this to be a more attractive strategy than a long condor
spread with calls or puts because you receive a net credit into your account
right off the bat.

Typically, the stock will be halfway between strike B and strike C when you
construct your spread. If the stock is not in the center at initiation, the
strategy will be either bullish or bearish.

The distance between strikes A and B is usually the same as the distance
between strikes C and D. However, the distance between strikes B and C
may vary to give you a wider sweet spot. You want the stock price to end
up somewhere between strike B and strike C at expiration. An iron condor
spread has a wider sweet spot than an iron butterfly. But (as always)
there's a tradeoff. In this case, your potential profit is lower.
Last edited by PebbleTrader on Thu Feb 28, 2013 8:07 pm, edited 2 times in total.
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