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BookingAlpha Option Trading Advisory

Thursday, January 13, 2011

Butterfly play on IBM, trade closed

Finally and after 26 days, I decided to close the Butterfly play on IBM that was open on December 17 (click here to read that article). And the reason for closing the position is that the market is in an obvious uptrend which is causing IBM to go up and up, and there was not more upside room for my butterfly position.

My profitability range was pretty decent
PROFIT RANGE : IBM stays between 141.27 and 148.72 by January 22.

Now, at the moment of closing the position IBM was at around 148.00, Which means IBM was inside my profitability range. Not by a huge margin but still inside my range. The Dow and the market in general have been soaring lately, keeping a steady upward trend since the opening of this position, and that is not good for neutral trades. So, not much money could be made on this one. The Butterfly was closed as follows:

SELL 1 January 150 PUT @2.86 (+$286)
BUY 2 January 145 PUT @0.82 (-$164)
SELL 1 January 140 PUT @0.18 (+$18)


So, for a small investment of $127 on the Butterfly, I received $140 twenty something days later. That is a $13 profit, on a $127 investment, or 10.24% return on Investment. Now, the funny part is that when you consider commissions, this play was a loser. I spent $11.80 to open the position plus $11.80 to close it. So $23.60 in commissions that leaves me negative overall since: profit - commissions < 0. Or in numbers: $13 - $23.60 = -$10.60. Commissions are a bitch!! And one lesson, if you don't have much capital, commissions can really represent a good portion of your positions. Take that into account when looking into someone's track record, or some subscription service, because they usually don't consider commissions costs when taunting their track records.

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