"I let my 24 years of "lessons learned" to act as an informational storehouse for my clients. We can then sort through the trading methods and risk management of the client to adapt to the current market conditions."
– Leslie Burton
Futures & Options Broker
11. Long Butterfly
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Scenario:
The trader currently has a #17 Ratio Call Spread. He thinks this is still a good position. However, he is worried that the futures may increase dramatically on the upside, leaving him with a substantial loss. He adds a long call and converts the position into a long butterfly.
Specifics:
| Underlying Futures Contract: | December Lean Hogs | |
| Futures Price Level: | 52.50 | |
| Days to Futures Expiration: | 74 | |
| Days to Options Expiration: | 45 | |
| Option Implied Volatility: | 21.5% | Option Position: | Long 1 Dec 52.00 Call | - 1.825 ($547.50) |
| Short 2 Dec 54.00 Calls | + 0.950 ($285.00) | |
| Long 1 Dec 56.00 Call | - 0.450 ($135.00) | |
| - 0.375 ($112.50) |
At Expiration:
| Breakeven: | Downside: 52.375 (52.00 strike + 0.375 debit). Upside: 55.625 (56.00 strike - 0.375 debit). |
|
| Loss Risk: | Losses start above 55.625, or below 52.375, but limited to the debit paid. Maximum loss above 56.00 strike or below 52.00 strike. | |
| Potential Gain: | Gains peak at strike of written calls. Maximum profit of 1.625 ($487.50). | |
Things to Watch:
There is not much risk in this position. Volatility has little effect. Avoid follow-up strategies unless you are quite certain of a particular move. Nearly every follow-up to this strategy requires more than one trade—possibly incurring large transaction costs.
Follow-up Trading Strategies
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