22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
will profit like a long position in 100 shares of the underlying. The
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maximum profit is reached if UPS is at $70 at expiration. Kathleen makes a
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5.00 profit from $65 to $70 on her 65 calls. But because she paid 2.00
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initially for the spread, her net profit at $70 is just 3.00. If UPS is above $70
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a share at expiration in this example, the two 70 calls will be assigned. The
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assignment of one call will offset the long stock acquired by the 65 calls
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being exercised. Assignment of the other call will create a short position in
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the underlying. That short position loses as UPS moves higher up to $75 a
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share, eating away at the 3.00 profit. If UPS is above $75 at expiration, the
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75 call can be exercised to buy back the short stock position that resulted
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from the 70’s being assigned. The loss on the short stock between $70 and
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$75 will cost Kathleen 5.00, stripping her of her 3.00 profit and giving her a
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net loss of 2.00 to boot. End result? Above $75 at expiration, she has no
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position in the underlying and loses 2.00.
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A butterfly is a break-even analysis trade . This name refers to the idea
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that the most important considerations in this strategy are the breakeven
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points. The at-expiration diagram, Exhibit 10.2 , shows the break-even
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prices for this trade.
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EXHIBIT 10.2 UPS 65–70–75 butterfly breakevens.
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If the position is held until expiration and UPS is between $65 and $70 at
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that time, the 65 calls are exercised, resulting in long stock. The effective
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purchase price of that stock is $67. That’s the strike price plus the cost of |