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My Iron Butterfly in the OR on life support
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My Iron Butterfly in the OR on life support

  #1 (permalink)
Trading Apprentice
Houston, TX/USA
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Posts: 11 since Jul 2013
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My Iron Butterfly in the OR on life support

I started paper trading with tradeMonster. They provide a fairly sophisticated ordering system (as do many brokerages now) and present most of the common option spreads. Tonight I decided to play around with an iron butterfly. I chose JCP and while it looked fairly flat, it also looked a bit bearish. JCP, in after hours trading was in the low 17's so I thought I'd manipulate the target price of the butterfly to be 16 to reflect the trend of the JCP stock. When I changed the target price from 17 to 16 the risk/reward went from 1.5/1 to 1/1. Another pre-order adjustment I did was I opened the range a little but (which I knew would reduce the max gain). I went ahead and set up the trade anyway because I was curious to see how it would go.

Is there a better type of spread to use that controls risk the way an Iron Butterfly does for a slightly bearish stock but provides a better overall risk/reward, or is it just a matter of spending more time fiddling with the underlying four components that make up the iron butterfly to hit upon a better risk/reward ratio?

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  #3 (permalink)
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Cogito ergo sum's Avatar
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Implied volatility is relatively cheap, therefore I would not trade an Iron butterfly or long a regular butterfly. This way one either receives a too small of a credit, or has to pay too much of a debit. In addition, this type of trade is fairly commission heavy, based on these reasons I would personally not open such type of trade in the current environment.

If you are slightly bearish with the current IV in the underlying, why not buy a put vertical or long a put calendar spread instead? You can skew the strikes to generate the desired trade structure that represents your outlook.

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Last edited by Cogito ergo sum; July 10th, 2013 at 04:22 AM.
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  #4 (permalink)
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I will also shout out to @ron99, he can probably comment.

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  #5 (permalink)
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Don't get fixated on a risk:reward number. There's really no such thing as 'improving' it. Cogito ergo sum has some good ideas with a vertical on directional calendar. If you're using options with shorter time frames, I wouldn't worry about using a butterfly either because the vega risk of a short term 'fly in JCP is going to be rather small.

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