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BookingAlpha Option Trading Advisory

Monday, November 15, 2010

Follow Up on Butterfly trade on SPY

This is a follow up on the Butterfly trade played on the SPY ETF. The initial trade was discussed here.

Well, the markets have gone down a little since the trade was open and along with it, as usual, most indexes and ETFs that track them. That is the case for the SPY which has gone down to 120.03 from 122.73 on November 9. Since our initial profit range had been defined from 122.54 to 127.47 we are in a losing position right now.

Take a look at the profit chart obtained from the ThinkOrSwim platform:

(Click on Image to enlarge)

As you can see, there is a loss of $104.69 at this point. Now, this group of options expires in five days. Two things could be done at this point.
One is closing the position. In that case you are stopping your loss and preventing the risk of reaching your maximum loss on the position (defined at $154).

The other way to go is let the trade arrive to expiration this Friday and by then SPY might be inside the profitability range should the markets go up.

The good thing about this strategy is that no matter how low the markets move, we have a limited risk, $154. So, right from the beginning you have the peace of mind that it does not matter how undisciplined and emotional you are, still you won't lose more than a predefined amount, that is all the loss that can be experienced. I am personally letting it run. A maximum loss of $154 for me is a small amount, so I'll stay in the game. Had I been trading a larger number of contracts you can bet I would have gotten out a while ago.
Well that's it for today folks!

First Part, Butterfly play on SPY (November 9, 2010)

Closing this trade on SPY (November 20, 2010)

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