call butterfly

[MTE]

Quote from steve0580:

Thanks to everyone for the input....

It's been pointed out that max value is 2.50, how are we getting to that value?

I'm assuming because this is the difference between either of 25 middle strikes to the 22.50 or 27.50. Thus 2.50-1.70?

Anyone have input on the trade? Would this be the ideal type of trade to have a butterfly on? I'm VERY neutral on this. The stock hasn't varied much in the last year, much less the last 2. I realize that .80 may not be much of a return but it's seems to be relatively "safe". (Is safe a word you can really use trading options?)

Assuming that I've sold two 25's, lets say that this expires at 26. I'll get exercised on the 25 calls and the 22.50 and 27.50 won't have enough appreciation to offset the exercise will it? If I that I'm likely to be exercised, would it be a better idea to close the position before it happens?

I know this may be easy for most of you but I'm still a newb. I've only dealt with directional strategy using calls/puts and bull put spreads. It seems to me that a butterfly is a more advanced strategy?

Yes, you are correct the max 2.5 is because of the distance between the wing and the body.

With regards to the stock expiring at 26, there're a few things you can do. Basically, since you'll end up short 100 shares after expiry, because one of the 25 calls will be offset by the 22.5 call, yet the other 25 call will remain. So, unless you are willing to take on weekend gap risk and just cover the stock the following Monday, you can either:

(a) close out the whole butterfly on Friday before close (or at least the 22.5 long and the two 25 shorts).

(b) you can buy 100 shares at close on Friday, which will then offset the assignment on one of the 25 calls.

 

[momoneythansens]

Yes, the long butterfly is short vega, short gamma and long theta.

It wants the underlying to sit still and gains value as time passes if in profit zone. It can be dissected as a short straddle with wings.

The short butterfly is long vega, long gamma and short theta.

It wants the underlying to move and decays over time. It can be dissected as a long straddle with wings.

Riskarb's suggestion for referencing flies via their vega/gamma characteristic is probably a good one if folks are up to speed with the greeks. My fault for confusing the situation!

MoMoney.

Quote from steve0580:

Isn't the idea on a butterfly to be short vega and short theta or is it short vega and long theta?

Ideally, we just want the price to stay at the middle strikes, right?

 

[zxcv1fu]

Check out:
http://www.redoption.com/options_basics_butterflies.php

If you are buying butterflies, it is better to look for paying around 0.1 of the spread ($0.25 in your case). Do not pay too much since it is a low probability & high reward strategy. The premium does not open up until close to the last week. The max will be a little less than $2.5 close to the last second. Unless you exercise you probably will not get the full $2.5. Best to buy indice european style butteflies.