For the month of March I am currently neutral to bearish on the OEX so I have decided to perform a "Broken Wing Butterfly strangle" on the index. This means that I am simultaneously entering a Put BWB Spread and a Call BWB Spread.
Current March Trades
Put BWB Spread
Long 1 x 500 Put
Short 2 x 485 Put
Long 1 x 450 Put
Net Credit = $15
Max Risk $2,000
Max Reward $1,515
Call BWB Spread
Long 1 x 505 Call
Short 5 x 515 Call
Long 4 x 530 Call
Net Credit = $1,130
(I increased the ratio between the long and short legs in the Call BWB in order to get a better credit.)
Max Risk $4,000
Max Reward $2,130
These two trades combined give me a good chance of making profit provided that the OEX stays between the break evens in March.
The lower break even for this combined position is 458.48.
The upper break even for this combined position is 520.39
Max profit at expiration on the downside occurs when the OEX is at 485.
Max profit at expiration on the upside occurs when the OEX is at 515
Should the OEX stay between 500 and 505, I will get to keep the credits received when the trades were initiated.
Let's look at the position risk graph (my mouse trap):
Can the OEX breach these break evens? Possible, so I am prepared to adjust the trades if the OEX makes a dramatic move towards my break even points. In the meantime, it is a waiting game... (boring isn't it?)
Happy trading! randomjaywalking