13 lines
880 B
Plaintext
13 lines
880 B
Plaintext
initial debit). If we distribute the 0.90 profit over the 2.50 move from
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$33.50 to $36, the butterfly gains about 0.36 per dollar move in Walgreen
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Co. (0.90/(36 − 33.50). This implies a delta of about 0.36.
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But the delta, with 31 days until expiration and Walgreen Co. at $33.50, is
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only 0.008, and because of negative gamma this delta will get even smaller
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as Walgreen Co. rises. Butterflies, like the vertical spreads of which they are
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composed, can profit from direction but are never purely directional trades.
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Time is always a factor. It is theta, working in tandem with delta, that
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contributes to profit or peril.
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A bearish butterfly can be constructed as well. One would execute the
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trade with all OTM puts or all ITM calls. The concept is the same: sell the
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guts at the strike at which the stock is expected to be trading at expiration,
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and buy the wings for protection. |