BUTTER FLY

Assuming XYZ trading at 45 Directional price target 43.

Buy to Open 44 PUT @2.38

2 Sell to open 43 PUT @1.67

Buy to Open 42 PUT @ 1.06

Net debit = (2.38+1.06) - 2*1.67 =0.1 ($10 per spread is RISK)

Max Reward

Max profit = (Middle strike - Lower strike - Net debit)*100

Assume XYZ closed at $43 at expiration

M<ax profit = 43-42-$0.1 = 90*100 = $90 per spread

ROC = 90/10 = 900% or R-R of 9 to 1.

IBD Butterfly NVDA example July

Buy 1 July 16, 715 call @ 56.95

Sell 2 July 16, 765 calls @ 25.50

Buy 1 July 16, 815 call @ 9.35

The total cost of the trade is $1,530 and that is the maximum loss potential.

The maximum gain is $3,470. We calculate it by taking the difference in strike prices less the premium paid ($5,000 less $1,530). The break-even prices are 730.30 and 799.70 (765 plus and minus 34.70). A butterfly trade has a tent-like shape with the potential for large profits around the short strike. It is important to keep in mind that achieving the maximum profit is a rare occurrence. So, a good aim for a butterfly trade is to make a 20% return on capital at risk. In this case that would be around $306.

In terms of risk management, I would adjust or close if either of the break-even prices were touched.

The Math of Unwinding Covered Call Writing Trades Early

 

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https://www.moneyshow.com//articles/tradingidea-56792/the-math-of-unwinding-covered-call-writing-trades-early/?scode=015363&utm_campaign=Trading%20Insights%20-%20Daily&utm_medium=email&_hsmi=134467472&_hsenc=p2ANqtz-8OHdNbwgzMSmxciYjNcvIP-yarWVQKVtYmAuh9ozdNpkF3zmWYbxP64FgGA_UDeayfYGwZOhTzq-CGDH1ysVrLz9wIuw&utm_content=134467472&utm_source=hs_email

Unwind calculations if both legs of the position are closed on 10/6/2020

The time-value cost-to-close (CTC) is 0.58%. There are 10 days remaining to contract expiration. We ask ourselves: Can we generate at least 1% more than the time-value CTC or 1.58% or more with a different security by 10/16/2020? If yes, we execute the mid-contract unwind exit strategy. If no or unsure, we take no action and continue to monitor the trade with possible rolling opportunities as expiration approaches.

Discussion

Exit strategy opportunities must be executed when beneficial to our overall portfolio success. To make these determinations, the BCI Calculators will assist as the formulas are built in to allow us to understand the mathematics of our trades. In the case of Alex’s TAN trade, a successful trade was executed with the possibility of establishing a second income stream in the same contract month with the same cash investment.