Friday, February 19, 2010

OEX March Trades


Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.

For the month of March I am currently ne
utral 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 positi
on 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


dream said...

1:5:4 call spread? Good stuff, buddy. :)

randomjaywalking said...

I wanted the big credit without sacrificing margin held so this was the best ratio at that point in time :)

dream said...

and honestly, thinkorswim is the best platform hands down for options trading; neither the IB nor my TS can match up. I'm jealous, man.

randomjaywalking said...

yeah i think its the ability to consolidate the separate spreads into one position so you can see how your mouse trap operates together...
btw how do the breakevens look?

dream said...

bro, your lower break-even is untouchable. There is no way S&P500 or S&P100 can drop 10% within 4 weeks unless something really bad happens. Even then, you don't have naked calls or puts.

The upper break-even is a coin flip though.

The best scenario is for $OEX to start moving down from next week and hovers between your put strikes until expiration; you'll get to keep your HUGE credit for your call BWB and get maximum profit for your put BWB. :)

randomjaywalking said...

Thats what I am hoping for :)