Sunday, April 18, 2010

OEX Modified BWBs for May

***Disclaimer***
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 those who are following this blog, the following example BWB trades can be looked at for the month of May. We are going to follow something different this month in that rather than putting on the traditional 1:2:1 BWB

Let's start with the basics.

After the major markets were spooked by the SEC announcement on GS, the OEX closed 9.19 points down on Friday at $544.68

The VIX moved higher from its previous close of 15.89 to Friday's close of 18.36

There are 20 more trading days till May expiration.

OEX volatility is currently at 17.65%.

Based on these numbers, the OEX Expected Move range for May is approximately $517 to the downside and $571 to the upside.

5% away from the OEX closing price is also $517 to the downside and $571 to the upside.

Let's assume a bearish stance to the market so we will be initiating a Put BWB.

A traditional 1:2:1 BWB can be constructed with the following strikes:

Example 1

Long 1 530 Put
Short 2 515 Put
Long 1 455 Put
Credit: $0.05

Max Profit: $1505
Max Loss: $4495
Lower Breakeven: $499.95

We are going to modify the BWB in attempt to (1) widen the strikes and (2) open the position for more credit to protect ourself if we were totally wrong.

The modified BWB can be thought of as a 1:3:2 broken butterfly but we are going to split the short strikes in a 2:1 ratio. The modified BWB is constructed as 1:2:1:2.

Example 2

Long 1 530 Put
Short 2 510 Put
Short 1 505 Put
Long 2 470 Put
Credit $0.20

Max Profit: $2020
Max Loss: $5480
Lower Breakeven: $497.42

This modified BWB trade in comparison the the traditional BWB is opened with a larger credit, higher profit potential, lower breakeven (more safety) but higher margin held.

If you were looking at maximizing your credit to open the position, you can also shorten the strike widths. This would also allow you to buy a higher strike tail put to lessen the margin held on the position. An example would be:

Example 3

Long 1 530 Put
Short 2 515 Put
Short 1 510 Put
Long 2 485 Put
Credit: $0.70

Max Profit: $1570
Max Loss: $3930
Lower Breakeven: $504.62

-randomjaywalking

1 comment:

stevegee58 said...

There are 20 point wide put ratios and 15 point wide call ratios available on OEX...