"As a trader, you don't have to be perfect, but you do have to be disciplined. Accept your losses if the market moves against you and don't let greed get in the way when it moves with you. It's not about buying at the lows and selling at the highs - it's how you manage the trade while you're in it that matters most."
– Nick Metzger
Futures & Options Broker
12. Short Butterfly
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Scenario:
This trader currently has a #19 Call Ratio Backspread, but now feels that the underlying futures will not explode on the upside. Instead, the trader feels that the market has an equal chance of going up or down, and thus converts the position into a short butterfly.
Specifics:
| Underlying Futures Contract: | June Swiss Franc | |
| Futures Price Level: | 0.7000 | |
| Days to Futures Expiration: | 30 | |
| Days to Options Expiration: | 20 | |
| Option Implied Volatility: | 12.2% | |
| Option Position: | Short 1 Jun 0.6900 Call | + 0.0129 ($1612.50) |
| Long 2 Jun 0.7000 Calls | - 0.0068 ($ 850.00) x 2 | |
| Short 1 Jun 0.7100 Call | + 0.0031 ($ 387.50) | |
| + 0.0024 ($ 300.00) |
At Expiration:
| Breakeven: | Downside: 0.6924 (0.6900 strike + 0.0024 credit). Upside: 0.7076 (0.7100 strike - 0.0024 credit). |
|
| Loss Risk: | Losses bottom at 0.7000 strike. Maximum loss of 0.0076 ($950). | |
| Potential Gain: | Gains top out at original net credit of 0.0024 ($300). This occurs when futures rise above 0.7100 strike, or fall below 0.6900 strike. | |
Things to Watch:
There is not much risk in this position. Volatility has little effect. You should 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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