18 lines
1.2 KiB
Plaintext
18 lines
1.2 KiB
Plaintext
EXHIBIT 10.3 UPS 60–65–75–80 iron condor.
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Although the forecast and trading objectives may be similar to those for
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the butterfly, the payout diagram reveals some important differences. First,
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the maximum loss is significantly higher with a condor or iron condor. In
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this case, the maximum loss is 4.35. This unfortunate situation would occur
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if UPS were to drop to below $60 or rise above $80 by expiration. Below
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$60, the call spread expires, netting 0.35. But the put spread is ITM.
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Kathleen would lose a net of 4.70 on the put spread. The gain on the call
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spread combined with the loss on the put spread makes the trade a loser of
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4.35 if the stock is below $60 at expiration. Above $80, the put spread is
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worthless, earning 0.30, but the call spread is a loser by 4.65. The gain on
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the put spread plus the loss on the call spread is a net loser of 4.35. Between
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$65 and $75, all options expire and the 0.65 credit is all profit.
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So far, this looks like a pretty lousy alternative to the butterfly. You can
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lose 4.35 but only make 0.65! Could there be any good reason for making
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this trade? Maybe. The difference is wiggle room. The breakevens are 2.65
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wider in each direction with the iron condor. Exhibit 10.4 shows these
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prices on the graph. |