Question about being exercised in a butterfly

K

kalikahuna

So, I have a question concerning the butterfly strategy.

Say you do a call butterfly spread. You sell 2 ATM call options and then buy 1 ITM call and 1 OTM call. Isn't the ATM call in danger of being exercised as soon as it goes a little ITM? And then, what happens? also, when is the best time to close out your position?
 
No, as long as there's time value (more than $0.25 as a rule of thumb) in the option the probability of it being assigned is fairly low.

A butterfly makes all its money in the last week so it is a trade off between more profit and higher gamma. Ideally, you want to hold it for as long as possible, Thu or Fri of the expiration week.
 
Quote from kalikahuna:

Thanks a lot MTE...so, is time value for that day/contract just the theta multiplied by the days left before expiration?
More...

Theta is far from static(linear). It accelerates as expiry approaches. Extrinsic value=otm premium. for atm and itm options subtract intrintic value(the meat) to get to the fat(time value).
 
Quote from kalikahuna:

Thanks a lot MTE...so, is time value for that day/contract just the theta multiplied by the days left before expiration?
More...

As it has been mentioned above, Theta is non-linear, so you can't just multiply theta by # of days.

If the stock is at the short strike in the last week the time decay is massive.
 
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