How does a butterfly behave at expiration when the stock ends up between the legs?

[Victor123]

I recently legged into a USO may 22 put butterfly (+1*19 -2* 19.5 + 1* 20)

Can you tell me how this position will look at expiration? Is my understanding correct?

1. USO > 20 --> All puts expire worthless ...I should not see anything in my account on Monday

2.USO = 19.25 --> Get assigned on 2 short 19.5 puts, 1 long 20 puts are exercised automatically and 1 *19 puts are worthless. So does that mean I see 100 shares of USO in my account bought at 19.50? Plus the profit from 1 * (20 - 19.50) = 0.50.

3. USO =19.75--> Only the long 20 puts expire ITM, so I am short 100 shares of stock at 20.

4. USO < 19 --> All puts expire ITM...long and short puts cancel each other out, so I see nothing in my account on Monday.


My point is, that if I fail to liquidate the resulting position quickly (in #2 and #3) before it moves against me, then my loss can easily exceed the theoretical max loss of a butterfly...which is the initial debit paid. Is it correct? I should not get too comfortable thinking that max loss of a butterfly is ALWAYS the initial debit paid.

 

[OTM-Options]

IMO ...... A 1-strike butterfly is way too narrow. Doesn't cost much, but the maximum loss strikes - 19 and 20 - are too cose to the body - 19.50. Pick your estimated price of the underlying at expiry and build the butterfly around that strike, leave room for the underlying to be off target. It will cost more but now the profit area is larger.

The maximum loss of a butterfly is the debit you paid - don't wait for auto-exercise, close before.

 

[Victor123]

IMO ...... A 1-strike butterfly is way too narrow. Doesn't cost much, but the maximum loss strikes - 19 and 20 - are too cose to the body - 19.50. Pick your estimated price of the underlying at expiry and build the butterfly around that strike, leave room for the underlying to be off target. It will cost more but now the profit area is larger.

The maximum loss of a butterfly is the debit you paid - don't wait for auto-exercise, close before.

Thanks. Will it always be possible to close before expiry...considering deep ITM options can have liquidity problems?

 

[mikhail]

I recently legged into a USO may 22 put butterfly (+1*19 -2* 19.5 + 1* 20)

Can you tell me how this position will look at expiration? Is my understanding correct?

Victor, I think the best way to understand how an option strategy works is by looking at the option strategy chart.

Here you can see what P/L you will make on your buttefly at expiry and 1 day before expiry:

I saved your strategy here, so you can see and play with it:

http://optioncreator.com/stykapt

 

[RPEX]

Both of those answers are stupid and don't address the question.

Yes OP is right, unless the options are cash settled or the underlying future cash settles on the same day then you will have a position in the underlying which you have to close out independently to lock in the profit you see. I don't understand the US stock system for determining the settlement price of the option, but if it's the close then you could put a market on close order on once you know the ballpark.

 

[Martinghoul]

With such a suggestive title, I am tempted to come up with all sorts of creative responses... Must resist.