call butterfly

S

steve0580

T, (the new symbol for SBC), has been trading in a range of around 23-24 for the last year or so.

I'm thinking of a butterfly but here's what I'm looking at on Feb. calls.

Feb 22.50 2.65
Feb 25.00 .50
Feb 27.50 .05

If I sell the 2 25's and buy the 22.50 and 27.50, I still end up paying 1.70.

If a butterfly has maximum value at exactly the middle strike price and I've spent 1.70, it appears to be a losing position to me.

What am I missing here? What is the maximum value this can attain?

Thanks...
 
I'm sure someone will correct me if I'm wrong...max value is 2.5, max profit is .80 (2.5-1.7) If you are neutral on the stock you might consider selling the b-fly (sell body buy wings) collect 1.7 (and the interest on it for the month) risk is the same 2.5 (give back the 1.7 plus .80)...if however the stock lands on 25 feb exp..you get to keep the 1.7..
Quote from steve0580:

T, (the new symbol for SBC), has been trading in a range of around 23-24 for the last year or so.

I'm thinking of a butterfly but here's what I'm looking at on Feb. calls.

Feb 22.50 2.65
Feb 25.00 .50
Feb 27.50 .05

If I sell the 2 25's and buy the 22.50 and 27.50, I still end up paying 1.70.

If a butterfly has maximum value at exactly the middle strike price and I've spent 1.70, it appears to be a losing position to me.

What am I missing here? What is the maximum value this can attain?

Thanks...
More...
 
As was pointed out, the max value is $2.50, so if you pay $1.70 then if the stock is at $25 at expiration you have a profit of $0.80, thus not a losing position. However you do need the stock to be right at the middle strike for max profit and in between $24.20 and $25.80 to have any profit.

Quote from steve0580:

T, (the new symbol for SBC), has been trading in a range of around 23-24 for the last year or so.

I'm thinking of a butterfly but here's what I'm looking at on Feb. calls.

Feb 22.50 2.65
Feb 25.00 .50
Feb 27.50 .05

If I sell the 2 25's and buy the 22.50 and 27.50, I still end up paying 1.70.

If a butterfly has maximum value at exactly the middle strike price and I've spent 1.70, it appears to be a losing position to me.

What am I missing here? What is the maximum value this can attain?

Thanks...
More...
 
Quote from DonnaV:

I'm sure someone will correct me if I'm wrong...max value is 2.5, max profit is .80 (2.5-1.7) If you are neutral on the stock you might consider selling the b-fly (sell body buy wings) collect 1.7 (and the interest on it for the month) risk is the same 2.5 (give back the 1.7 plus .80)...if however the stock lands on 25 feb exp..you get to keep the 1.7..
More...

Technically, you're buying a butterfly or selling an Iron butterfly. The two are identical anyway.
 
Yeah, always room for confusion (and disagreement) on the terminology for this one:

(Ex.) MMs in my experience, tend to refer to long butterflies as being long the wings and short the body.

Some retail traders tend to refer to long butterflies as butterflies that incur an initial debit for the trade.

So the dispute comes over whether an iron butterfly done for a credit is actually long or short LOL. Some folks call it long (as it is long the wings) and others call it short, incorrectly IMO (as you receive a credit).

In any case, the three variations: PUT (debit), CALL (debit) and IB (credit) are all synthetically equivalent with identical risk profiles.

You get a credit for the IB due to the short box attached to the debit fly.

This butterfly wants the underlying to sit still/trade in a narrow range etc. making maximum profit only at body strikes and only at expiration.

MoMoney.

Quote from MTE:

Technically, you're buying a butterfly or selling an Iron butterfly. The two are identical anyway.
More...
 
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?
 
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?
 
If you sell the body and buy the wings you paid 1.70 (right?) so at 26 the value will be .70 and you will have lost 1.00 on the other hand if you bought the body and sold the wings then you will make .70 at 26 (and give back 1..again right?) sooooo if you are truly neutral and believe the trade will end at 25 is it better to buy or to sell the body?
 
Quote from DonnaV:

If you sell the body and buy the wings you paid 1.70 (right?) so at 26 the value will be .70 and you will have lost 1.00 on the other hand if you bought the body and sold the wings then you will make .70 at 26 (and give back 1..again right?) sooooo if you are truly neutral and believe the trade will end at 25 is it better to buy or to sell the body?
More...

If the stock is at 26 then the butterfly with short body will be worth 1.5 (the 22.5 call is @ 26-22.5=3.5 less 2 25 calls @ 26-25=1*2). So your loss is 0.2.

If you are neutral and believe the stock will end up at 25 then you should sell the body as buying the body would result in a loss if the stock expires at 25.

Buying the body means that you want the stock to move outside the wing strikes. It's like a long straddle with capped profit potential.
 
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