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Last Updated: May 6, 2008 - 6:47:21 AM |
In my prior article we set a price target on GOOG and set up a DIRECTIONAL BUTTERFLY SPREAD based on that price target. The purpose here is to display the impact and control we have as OPTION STRATEGIST's. We can tweak the positions, and when we do, it can change the outcome drastically. With all of the choices we have, there are several ways to put on a strategy but the key is to build it in a fashion that will suit our own particular situation.
In the first BUTTERFLY I used a more conservative approach. In this article we will illustrate how a variation in the STRIKES can impact the outcome even with the same price target. Please keep in mind our objective is to cover the OPTION PRODUCTS by themselves and what they do. I am trying to keep this as streamlined as possible, not touching on COMMISSIONS or MARGIN/MAINTENANCE REQUIREMENTS.
In the First BUTTERFLY we used the STRIKES of 490/500/510 with a 10 point difference between the strikes on GOOG price target of 500. Now we will use the STRIKES of 480/500/520 (20 points apart) with the same price target of 500.
|
STRIKE |
PL |
|
POSITIONS |
|
521 |
(6,700) |
|
10 / 480 CALLS @ 13.50 |
|
520 |
(6,700) |
|
-20 / 500 CALLS @ 3.70 |
|
519 |
(5,700) |
|
10 / 520 CALLS @ .60 |
|
518 |
(4,700) |
|
|
|
517 |
(3,700) |
|
DEBIT $6700 |
|
516 |
(2,700) |
|
|
|
515 |
(1,700) |
|
|
|
514 |
(700) |
|
|
|
513 |
300 |
|
|
|
512 |
1,300 |
|
|
|
511 |
2,300 |
|
|
|
510 |
3,300 |
|
GOOGLE |
|
508 |
5,300 |
|
|
|
506 |
7,300 |
|
|
|
504 |
9,300 |
|
|
|
502 |
11,300 |
|
|
|
500 |
13,300 |
|
|
|
498 |
11,300 |
|
|
|
496 |
9,300 |
|
|
|
494 |
7,300 |
|
|
|
492 |
5,300 |
|
|
|
490 |
3,300 |
|
|
|
488 |
1,300 |
|
|
|
486 |
(700) |
|
|
|
484 |
(2,700) |
|
|
|
482 |
(4,700) |
|
|
|
480 |
(6,700) |
|
MAX GAIN = 13,300 |
|
478 |
(6,700) |
|
MAX LOSS = 6,700 |
|
476 |
(6,700) |
|
|
|
474 |
(6,700) |
|
PROFIT RANGE |
|
472 |
(6,700) |
|
488 - 513 |
|
470 |
(6,700) |
|
|
As we can see, the maximum gain is substantially higher than when we used the 490/500/510 Butterfly where the strikes were 10 points apart. You should also notice that the risk has increased quite a bit as the maximum loss has increased to $6,700.
To take a deeper look, lets look at the two BUTTERFLIES side by side where we can see just how much these two strategies can vary from a slight adjustment in what strikes are applied.
|
POSITIONS |
STRIKE |
PL |
|
STRIKE |
PL |
|
POSITIONS |
|
10 / 480 CALLS @ 13.50 |
521 |
(6,700) |
|
511 |
(1,700) |
|
10 / 490 CALLS @ 7.50 |
|
-20 / 500 CALLS @ 3.70 |
520 |
(6,700) |
|
510 |
(1,700) |
|
-20 / 500 CALLS @ 3.70 |
|
10 / 520 CALLS @ .60 |
519 |
(5,700) |
|
509 |
(700) |
|
10 / 510 CALLS @ 1.60 |
|
|
518 |
(4,700) |
|
508 |
300 |
|
|
|
DEBIT $1700 |
517 |
(3,700) |
|
507 |
1,300 |
|
DEBIT $1700 |
|
|
516 |
(2,700) |
|
506 |
2,300 |
|
|
|
|
515 |
(1,700) |
|
505 |
3,300 |
|
|
|
|
514 |
(700) |
|
504 |
4,300 |
|
|
|
|
513 |
300 |
|
503 |
5,300 |
|
|
|
|
512 |
1,300 |
|
502 |
6,300 |
|
|
|
|
511 |
2,300 |
|
501 |
7,300 |
|
|
|
GOOGLE |
510 |
3,300 |
|
500 |
8,300 |
|
GOOGLE |
|
|
508 |
5,300 |
|
499 |
7,300 |
|
|
|
|
506 |
7,300 |
|
498 |
6,300 |
|
|
|
|
504 |
9,300 |
|
497 |
5,300 |
|
|
|
|
502 |
11,300 |
|
496 |
4,300 |
|
|
|
|
500 |
13,300 |
|
495 |
3,300 |
|
|
|
|
498 |
11,300 |
|
494 |
2,300 |
|
|
|
|
496 |
9,300 |
|
493 |
1,300 |
|
|
|
|
494 |
7,300 |
|
492 |
300 |
|
|
|
|
492 |
5,300 |
|
491 |
(700) |
|
|
|
|
490 |
3,300 |
|
490 |
(1,700) |
|
|
|
|
488 |
1,300 |
|
489 |
(1,700) |
|
|
|
|
486 |
(700) |
|
488 |
(1,700) |
|
|
|
|
484 |
(2,700) |
|
487 |
(1,700) |
|
|
|
|
482 |
(4,700) |
|
486 |
(1,700) |
|
|
|
MAX GAIN = 13,000 |
480 |
(6,700) |
|
485 |
(1,700) |
|
MAX GAIN = 8,300 |
|
MAX LOSS = 6,700 |
478 |
(6,700) |
|
484 |
(1,700) |
|
MAX LOSS = 1,700 |
|
|
476 |
(6,700) |
|
483 |
(1,700) |
|
|
|
PROFIT RANGE |
474 |
(6,700) |
|
482 |
(1,700) |
|
PROFIT RANGE |
|
488 - 513 |
472 |
(6,700) |
|
481 |
(1,700) |
|
492 - 508 |
|
|
470 |
(6,700) |
|
480 |
(1,700) |
|
|
There is no definite answer as to which BUTTERFLY is better but we can always compare several scenarios as a way to guide us in finding a more suitable strategy that fits our own personal criteria. In the above illustration we can see the major differences in maximum gain and loss. It should also be noted that the BUTTERFLY with a lower risk has a smaller profit zone compared to other BUTTERFLY. We can see that both strategies reach their maximum profit with GOOG hitting the price target of 500 but the outcomes will vary based on what choices are made and how the BUTTERFLIES are built.
Frank Kneipher
FK77@COMCAST.NET
© Copyright 2008 by OptionsMentoring.com
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