Quote from Maverick74:
OK, see I can tell by your writing that you are "looking" for a position that will make you money. Just the term broken wing butterfly which has been used extensively at seminars and in option books geared towards the retail trader tells me that there is something you are afraid of. A lot of guys come to options for some reason because they think they can either construct positions with no or little risk or because they are afraid to trade outright direction.
Broken wing butterflys are no better then a regular fly and no better then a back spread or even a covered call for that matter. The first thing you need to do when you decide you want to start trading is define what your edge is. Assuming you are not a market maker and earning the spread on all your positions, your edge has to come from somewhere.
For 99% of the guys here, that is probably direction. So now the question becomes if you are going to take a directional position, why do you think a broken wing butterfly is better then a covered call (naked put) or better then shares or better then a calendar? You need to answer these questions internally so you know what you're trying to do. I often find when I talk to guys that trade options that they never actually know what it is they are trying to do. I'll ask them 100 ways from Sunday and can never get an answer. If you don't know what you're trying to do, actually doing it becomes a little challenging.
ok let start some demo position by the way I do trade options for a few years, Thou not as knowledgable but good enough to make some cookie money.
Let say index at 100, I have no 0 clue where market is going. I do not know if the index will even go up or down. No idea.
I can construct a typical out of money spread pay some money .
put side
buy 1 95 P
Sell 2 90 P
buy 1 85 P
call side
buy 1 105
sell 2 110
buy 1 115
it is easy to see the above breakeven point for the typical butterfly. As it is a debit so the index must move inside the range to stay profitable if it stay 95 - 105 this position lose money
so let try a broken wing butterfly it can be done with a credit or debit, in this case we talk about credit of $10 or $20 to cover commission
buy 1 95 put
sell 2 90 Put
buy 1 75 put
buy 1 105 call
sell 2 110 call
buy 1 125 call
now we have a wide range of profit, with the index of 100. we have a profit 85 - 115 range. and home run will be hit at 95 to 85 or 105 to 115. At 95 to 105 it is a breakeven trade.
would that be good?
a more complex broken wing will be as below. I explain the call side but the sceneraio apply to both side
buy 1 105 call
sell 2 115 call
buy 1 120 call
this is done with a debit let say 2 point debit. As the market goes up close the 105 call and buy the 115 call for at least more than 2 points, this result in a free trade on the call side. What if the market never go up, then the market is going down then you convert your put side into a free trade. Now we have a call bwb that we spend 2 points on so to cover this 2 point we can sell some spread above or below to collect.
I would prefer the last spread, is it complex?
