Tuesday, March 16, 2010

Unbalanced Butterfly

So for some strange reason I was interested in constructing a butterfly going into OPEX on the SPY. Now I am not going to take this play, but it is interesting. I am not going to take it because of the premis of why I was interested in the first place. I wanted to take the trade because I think the market needs a rest and as you will recall in my previous post I noted that the retail trader has an edge but one of the assumptions is that they don't be a hero and just trade price action. This would go against what the price action is telling us. But nonetheless it might be something to consider in the future.

If you take a look at the analysis below. I have graphed a unbalanced butterfly that makes money as long as the SPY stays below 116.40 by option expiration and makes a maximum profit at the 115 strike, $1,224 (it is a 114/115/118 butterfly. You would actually take in a credit of $53 per butterfly. And unlike a traditional butterfly it is profitable anywhere below 116.40 for a minimum around $500. Max loss at 118 or above is about $1,000.

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