23 lines
1.6 KiB
Plaintext
23 lines
1.6 KiB
Plaintext
the spread; that’s the lower break-even price. The other break-even is at
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$73. The net short position of 100 shares resulting from assignment of the
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70 call loses more as the stock rises between $70 and $75. The entire 3.00
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profit realized at the $70 share price is eroded when the stock reaches $73.
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Above $73, the trade produces a loss.
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Kathleen’s trading objective is to profit from UPS trading between $67
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and $73 at expiration. The best-case scenario is that it declines only slightly
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from its price of $70.65 when the trade is established, to $70 per share.
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Alternatives
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Kathleen had other alternative positions she could have traded to meet her
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goals. An iron butterfly with the same strike prices would have shown about
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the same risk/reward picture, because the two positions are synthetically
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equivalent. But there may, in some cases, be a slight advantage to trading
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the iron butterfly over the long butterfly. The iron butterfly uses OTM put
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options instead of ITM calls, meaning the bid-ask spreads may be tighter.
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This means giving up less edge to the liquidity providers.
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She could have also bought a condor or sold an iron condor. With condor-
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family spreads, there is a lower maximum profit potential but a wider range
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in which that maximum payout takes place. For example, Kathleen could
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have executed the following legs to establish an iron condor:
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Essentially, Kathleen would be selling two credit spreads: the July 60–65
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put spread for 0.30 and the July 75–80 call spread for 0.35. Exhibit 10.3
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shows the payout at expiration of the UPS July 60–65–75–80 iron condor. |