21 lines
1.3 KiB
Plaintext
21 lines
1.3 KiB
Plaintext
are considered long spreads. And credit condors or butterflies are
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considered short spreads.
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The words long and short mean little, though in terms of the spread as a
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whole. The important thing is which strikes have long options and which
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have short options. A call debit spread is synthetically equal to a put credit
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spread on the same security, with the same expiration month and strike
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prices. That means a long condor is synthetically equal to a short iron
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condor, and a long butterfly is synthetically equal to a short iron butterfly,
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when the same strikes are used. Whichever position is constructed, the best-
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case scenario is to have debit spreads expire with both options in-the-money
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(ITM) and credit spreads expire with both options out-of-the-money
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(OTM).
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Many retail traders prefer trading these spreads for the purpose of
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generating income. In this case, a trader would sell the guts, or middle
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strikes, and buy the wings, or outer strikes. When a trader is short the guts,
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low realized volatility is usually the objective. For long butterflies and short
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iron butterflies, the stock needs to be right at the middle strike for the
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maximum payout. For long condors and short iron condors, the stock needs
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to be between the short strikes at expiration for maximum payout. In both
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instances, the wings are bought to limit potential losses of the otherwise
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naked options. |