SMB CAPITAL Broken Wing Butterfly

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Broken Wing Butterfly

Video Two: Bullish Broken Wing Butterflies

Overview • Broken wings for stocks moving higher • Looking at specific examples • Deeper look at the risk graphs • Detailed risk management • “Knowing” when to get out

Broken Wings Bullish Market

Expected Move Calculation (implied volatility) * (stock price) * (√Trading Days) 15.87

Equals: +/ Expected Move

1 2 3 4 5 6 7 Let’s Find a Broken Wing Butterfly Assess trend - higher Select option expiration Find target - set as body of butterfly Select strikes for butterfly Make wide as possible Analyze loss exits Execute

Assess Trend GOOG November 11, 2011

Select Option Expiry

Find Target • Overhead resistance around $635 • High end of expected range $640 • (see option chain 16 ∆) • Next, set strikes for butterfly

635-640-650 calls ($5)

(0.45)

Risk = $4.55 Reward = $5.45

630-640-655 calls ($10)

$0.05

Risk = $5.05 Reward = $4.95

625-640-660 calls ($15)

$0.80

630-640-655 ($10 wide)

$0.00

Risk = $5.00 Reward = $5.00

Analyze Loss Exits Risk Graph - 11/2 $585 20% Loss $652 Today’s loss exit $67 away.

Risk Graph 11/2 Looking at Two Weeks Prior Expiry Day before expiry

T+14 days

T+21 days

T+28 days

T+35 days

T+41 days Exit? What happens in a 1 SD move?

Example Two

Assess Trend SPY December 29, 2011

Select Option Expiry

Find Target • Overhead resistance around $130-131 • High end of expected range $132 • (see option chain 16 ∆) • Next, set strikes for butterfly

131-132-134 calls ($1)

(0.02)

But...only $1 wide.**

130-132-135 calls ($2)

$0.16

Risk = $2.16 Reward = $1.84

Analyze Loss Exits Risk Graph - 12/29 $126 20% Loss $132.30

Today’s loss exit $6.30 away.

Risk Graph 12/29 Looking at Two Weeks Prior Expiry Day before expiry 20% Loss $132.30

T+6 days 20% Loss $132.30

T+12 days 20% Loss $132.30

T+15 days 20% Loss $132.30

T+21 days 20% Loss $132.30

T+23 days Exit? What happens in a 1 SD move?

Review • Bullish market, set target for stock move • TA, expected move, or both • Select strikes; make as wide as possible for credit • Analyze loss exits • Use your skills to maximize: expected moves, greeks, reading the chain

Preview of Video 3 • Trading Bearish Broken Wing Butterflies • Specific examples • Different considerations • Management rules • Deeper look at risk graphs • “Knowing” when to get out