Trading Strategies Profit Making Techniques For Stock_9

218 TABLE 17.5 Price 515 520 525 530 535 540 Long Butterfly Results and Short Call Results Long butterfly −1/4 −1/4 +43/4 −1/4 −1/4 −1/4 OPTION STRATEGIES Short call +71/2 +71/2 +71/2 +21/2 −21/2 −71/2 spread is that you are also giving up the miniscule risk of the long butterfly if the market continues higher. Converting the position to either a short call or a long put is the most bearish alternative. This entails liquidating three of the four options in the butterfly. Continuing with the example in Table 17.4, Table 17.5 shows the results of keeping the original butterfly spread versus moving to the short 525 call at 71/2. This shows that shorting the call at the middle strike can be an attractive alternative if you have turned bearish. Note, however, that the short call has greater risk if the market rallies significantly. The alternative to a short call is to hold a long put if you have initi-ated a butterfly using puts. This will have greater profit potential than the short call but also more risk. One main problem with converting to the put is that the break-even point is lower than with the short call. Another disadvantage is that you are selling time premium rather than buying time premium. Rolling down entails liquidating the current butterfly and initiating a new position with lower strike prices. You might be taking a loss on the initial position, looking to increase your profit potential if prices stay at their current position. Table 17.6 shows an example of rolling down so that the middle strike is at-the-money. In this case, you are rolling down to the 515, 520, and 525 strikes with prices of 111/4, 97/8, and 71/2, respectively. A more bearish tactic would be to lower the strike prices even further. TABLE 17.6 Price 515 520 525 530 Long Butterfly Results and Roll Down Results Original butterfly −1/4 −1/4 +43/4 −1/4 New butterfly +1 +6 +1 +1 Butterfly Spreads 219 If the Price of the Underling Instrument Rises Bullish Strategies If the UI price rises and you are bullish, you could: 1. Liquidate the position; 2. Convert to bull spread; 3. Convert to short put(s) or long call(s); or 4. Roll up. Liquidating the position can make sense if prices have rallied to out-side the profit zone and if you can limit you losses to something less than the initial risk. Because the risk in long butterflies is usually very low, most investors do not liquidate their existing position, waiting, instead, for the price to slump back to the profit zone. Converting the position into a bull spread is basically saying that you are no longer neutral on the market but have become bullish. Look at an example of the differences in results using this approach versus leaving the original position untouched. Table 17.7 shows these results. Assume that the trade was initiated with the following prices: OEX = 530 December 520 call = 151/2 December 525 call = 13 December 530 call = 103/4 Net debit of 1/4 However, the market has jumped to 535, you have switched to the bull camp, and prices are now: OEX = 535 December 520 call = 211/8 December 525 call = 181/2 December 530 call = 161/2 TABLE 17.7 Price 520 525 530 535 540 Long Butterfly Results and Bull Call Spread Results Long butterfly −1/4 +43/4 −1/4 −1/4 −1/4 Bull spread −25/8 +23/8 +23/8 +23/8 +23/8 220 TABLE 17.8 Price 515 520 525 530 535 540 545 Long Butterfly Results and Long Call Results Long butterfly −1/4 −1/4 +43/4 −1/4 −1/4 −1/4 −1/4 OPTION STRATEGIES Long call −211/8 −211/8 −161/8 −111/8 −61/8 −11/8 +37/8 Notice that you will make more money sticking with the long butterfly if the market stabilizes, but you will make more money on shifting to the bull spread if the market moves higher. The drawback to the shift to the bull spread is that you are also giving up the miniscule risk of the long butterfly if the market continues lower. Converting the position to either a long call or a short put is the most bullish alternative and entails liquidating three of the four options in the butterfly. Continuing with the example in Table 17.7, Table 17.8 shows the results of keeping the original butterfly spread and moving to the long 520 call at 211/8. The net result is that you must have become very bullish to want to shift to a long call over holding the existing butterfly. The risks and the rewards are significantly higher for the long call than the butterfly. This ex-ample uses the 520 call and understates the attractiveness of shifting to the other call, the 530. The 530 call would have less premium and, therefore, less risk. Nonetheless, you still need to be much more bullish to be induced to shift to the long call strategy. The alternative to a long call is to hold one of the short puts. This has less profit potential than the long call and more risk. The main advan-tage is that you will make money at a lower level compared with the long call. Another advantage is that you are selling, rather than buying, time premium. The final possibility is to roll up, which entails liquidating the current butterfly and initiating a new position with higher strike prices. You may take a loss on the initial position, looking to increase your profit poten-tial if prices stay at their current position. Table 17.9 shows an example of rolling up so that the middle strike is at-the-money. In this case, you are rolling up to the 525, 530, and 535 strikes with prices of 121/2, 10, and 81/4, respectively. A more bullish tactic is to raise the strike prices even further. Butterfly Spreads 221 TABLE 17.9 Price 520 525 530 535 Long Butterfly Results and Roll Up Results Original butterfly −1/4 +43/4 −1/4 −1/4 New butterfly −3/4 −3/4 +41/4 −3/4 You have basically shifted your profit zone to a higher level at a cost of additional commissions and probably a loss on the original butterfly. Nonetheless, this is a viable tactic if you are convinced that prices will not change much from their current level. Neutral Strategies If the UI price rises and you look for prices to sta-bilize, you could: 1. Hold the position; 2. Liquidate the position; or 3. Roll up. Holding the current position makes sense if the UI price will stay within the limits of the two break-even points. Otherwise, you should con-sider one of the other tactics. Liquidating the position can make sense if prices have risen to out-side the profit zone and if you can limit your losses to something less than the initial risk. Because the risk in long butterflies is usually very low, most investors do not liquidate their existing position, waiting, instead, for the price to drop back into the profit zone. Rolling up is also sensible if you are looking for prices to stabilize. You will be swapping a small loss in the original butterfly plus some com-missions for a greater chance at profit at current levels. Table 17.6 and the discussion surrounding it show the potential value of this tactic. Bearish Strategies If the UI price rises and you are bearish, you could: 1. Hold the position; 2. Convert to bear spread; or 3. Convert to short call(s) or long put(s). 222 TABLE 17.10 OPTION STRATEGIES Long Butterfly Results and Bear Call Spread Results Price Long butterfly 520 −1/4 525 +43/4 530 −1/4 535 −1/4 Bear spread +21/4 +21/4 −23/4 −23/4 Holding the current position makes sense if the UI price will stay within the limits of the two break-even points. For example, prices might have rallied to above the upper break-even point. Now that you are more bearish, it makes sense to hold the position, looking for it to slump back into the profit zone. On the other hand, if you are so bearish that you think the price will go to below the down-side break-even, you will still want to hold the position and liquidate it when it moves to the middle strike price. Liquidating the position can make sense if prices have rallied to out-side the profit zone and if you can limit your losses to something less than the initial risk. Because the risk in long butterflies is usually very low, most investors do not liquidate their existing position, waiting, instead, for the price to drop. Converting the position into a bear spread is basically saying that you are no longer neutral on the market but have become bearish. Look at an example of the differences in results from using the long 530 call/short 525 call bear spread versus leaving the original position untouched. Table 17.10 shows these results at expiration. Assume that the trade was initiated with the following prices: OEX = 530 December 520 call = 151/2 December 525 call = 13 December 530 call = 103/4 Net debit of 1/4 However, the market has jumped to 535, you have switched to the bear side, and prices are now: OEX = 535 December 525 call = 18 December 530 call = 153/4 ... - tailieumienphi.vn