"Automated execution of mechanical trading systems liberates the trader from the roller coaster of emotions so prevalent in other "hands on" approaches to the markets."
– Glenn Swanson
President
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
MENU - Futures Strategy Guide
Contents Courtesy of CME.com
