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1 year ago
in Time to take a bite of the AAPL? on Beanieville
what the hell is buttfly? can you stop your chatter and explain what a butterfly is?
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1 year ago
in The Rise of The Solar Phoenixes? on Beanieville
Adam what is a butterfly? Can you explain in detail?
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Adam_G
A butterfly is an options strategy that can be done with calls or puts where you buy 2 options with 2 different strike prices and sell 2 options with the same strike price. For example, I did a 15-20-25 butterfly on RMBS today. I bought the 15 and 25 calls and sold two 20 calls.
When you do this you hope for the stock to stay between the outer strikes, with the maximum gain when the stock is at the mid strike price.
If you have followed my trades here for the last couple of weeks, I do these right before an earnings announcement because implied volatility is high i.e. the options are expensive. The butterfly profits from the decrease in implied volatility. Basically this happens when the mid strike that I short decreases by much more than the two options I buy.
You may ask why I buy the two calls. I do this to prevent an unlimited loss. You can profit from a decrease in implied volatility by selling a call and put at the same strike, but this could cause an unlimited loss. With these the most you can lose is the amount you put in.
Because you are trading 4 options with 3 different strikes, you are having to pay 3 different bid ask spreads, so you need to know what the spread is. I generally avoid doing these when the bid ask spread is $0.50. Also use an options friendly broker to do these because commissions will eat you alive also. It generally costs me $3.40 for each of these with Interactive Brokers. ETrade would be 10x that probably.
If anyone has any questions feel free to ask.
When you do this you hope for the stock to stay between the outer strikes, with the maximum gain when the stock is at the mid strike price.
If you have followed my trades here for the last couple of weeks, I do these right before an earnings announcement because implied volatility is high i.e. the options are expensive. The butterfly profits from the decrease in implied volatility. Basically this happens when the mid strike that I short decreases by much more than the two options I buy.
You may ask why I buy the two calls. I do this to prevent an unlimited loss. You can profit from a decrease in implied volatility by selling a call and put at the same strike, but this could cause an unlimited loss. With these the most you can lose is the amount you put in.
Because you are trading 4 options with 3 different strikes, you are having to pay 3 different bid ask spreads, so you need to know what the spread is. I generally avoid doing these when the bid ask spread is $0.50. Also use an options friendly broker to do these because commissions will eat you alive also. It generally costs me $3.40 for each of these with Interactive Brokers. ETrade would be 10x that probably.
If anyone has any questions feel free to ask.
http://en.wikipedia.org/wiki/Butterfly_(options)
If you don't have an options friendly broker, don't try to do these because you will lose money.