Transcript SMB CAPITAL OPTIONS TRADING PROGRAM

SMB CAPITAL
Broken Wing Butterfly
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Broken Wing Butterfly
Video Three:
Bearish Broken Wing
Butterflies
Overview
• Broken wings for stocks moving lower
• More detail on managing and knowing when to get out
• Volatility curve changes the landscape
• But, same management applies
Broken Wings
Bearish Market
Knowing When to Get Out
•
Reading “up and down” the option chain
•
Shows the change in option and spread values
•
Doesn’t consider time or volatility changes, but...
•
Does better job of forecasting price changes due to
stock price changes
•
Takes into account the volatility curve
Volatility Curve
AAPL
AAPL Put Vol
AAPL ATM Vol
AAPL Call Vol
Reading the Chain
(0.50)
Stock Moves Down $5
(0.50)
Stock Moves Down $5
(0.60)
$5 closer
to the money
Stock Moves Down $10
(0.70)
$10 closer
to the money
Let’s Find a Broken Wing Butterfly
1
Assess trend - lower
2
Select option expiration
3
Find target - set as body of butterfly
4
Select strikes for butterfly
5
Make wide as possible
6
Analyze loss exits
7
Execute
Assess Trend
AAPL September 23, 2011
Select Option Expiry
I chose due to
market conditions.
Select Option Expiry
Find Target
•
One week expected range using 16∆
•
Next, find the strikes you want to use
385-380-370 puts ($5)
(0.20)
Trade Date September 23, 2011
T+3
T+4
T+5
T+6
Option Expiry
20 Minutes to the Bell:
Closing the Trade
Sell the 385 once,
Buy the 380 twice,
as a ratio spread,
for a credit of $2.05.
The 370 expires.
Review
•
Bearish market, set target for stock move
•
TA, expected move, or both
•
Select strikes; make as wide as possible for credit;
easier to get credit with puts
•
Analyze loss exits
•
Use your skills to maximize: expected moves,
greeks, reading the chain
Preview of Video 4
•
Advanced concepts
•
Market conditions always changing
•
Low volatility environments especially tough
•
High volatility environments are great, but...
•
Variations, multiple positions