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| Subject: Iron Butterfly spread question | Date: 12/27/2021 12:56 PM | |
| Author: JustMee01 | Number: 11352 of 11360 | |
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I've never used butterfly spreads before. On occasion, I'll have a long call in my portfolio. More often, I'll write puts on stocks that I'd own and covered calls for lunch money. I also write bull put spreads on trending stocks for pocket change. I'm a dabbler that pretty much understands the mechanics. But not on more complex multileg spreads. I'd like to confirm max loss on a couple of iron butterfly/ iron condor trades. I've never played with this kind of trade. My understanding is that they are ideal for range bound stocks. I want to make sure that I understand their construction and loss profile properly. AFL is rangebound between 52 and 60 and has been for six months. It trades today at 58. So this a real candidate for a trade. Both are net credit trades, with short NTM legs. First the iron butterfly: long Jan21,2021 AFL 60 call short Jan21 AFL 57.50 call short Jan21 AFL 57.50 put long Jan21 AFL 55 put Q1: The max loss on this position is $250 (minus the net credit on the options) if AFL closes over 60 or under 55 on Jan21. Correct? Q2: Is this trade assembled correctly? The ideal would be for AFL to settle at 57.50, with the two short options canceling each other out. But the real goal as I see it, is for AFL to remain rangebound. The timevalue on the more valuable short options (both near the money), erodes and you capture that when you close out the trade. Correct? Now the iron condor: long Jan21 AFL 60 call short Jan21 AFL 58 call short Jan21 AFL 57 put long Jan21 AFL 55 put Q1: The max loss is $200 (minus the net credit) if AFL closes over 60 or under 55. Correct? Q2: Is this condor assembled correctly? The ideal would be for AFL to settle between 57 and 58 on Jan21, with the two short options expiring. You keep the net credit on the spread. But it's okay for AFL to remain rangebound. Some of the timevalue on the NTM short options would still be captured by closing the position after it erodes. Any corrections or insight appreciated.... Peter |
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