Friday, February 8, 2008

Adjust: RUT Broken Wing Butterfly Feb 670/690/730

On 1/25, I opened a broken wing butterfly. Today, I did something funky for probability, with the help of Mojo at InsaneMoney.com. Here's how I understand it...

I started with a butterfly of:
6 Feb 670 Calls
12Feb 690 Calls
6Feb 730 Calls
For a credit of $5.65

Today, I closed out of:
5 Feb 670 Calls
10 Feb 690 Calls
5 Feb 730 Calls
For a credit of $0.62

Max reward= original12 contracts of $5.65
Max reward on remaining 2 contracts after closing 10= $6.27 ($5.65 + $0.62)
Max risk= $20-$5.65= $14.35

Max profit:
So today I closed 10 contracts & booked a profit of $6,780 ($5.65 X 12 contracts) plus $124 ($0.62 X 2 contracts), leaving 2 contracts
Max risk on 2 remaining contracts= $2,870 ($14.35 X 2 contracts)

6.27/14.35= +44% ROI

If the stock expires right around 690 on exp. day, then I have the shot at making a full $25.65 ($20 diff of top 2 strikes plus original credit of $5.65).
If the stock expires below 710 (which was my embedded butterfly strike), then I keep $5.65.
My Breakeven (B/E) is $715.65 (710 strike plus 5.65)

By sizing down in this manner, this still gives a chance to see if I can make the full $25.65 profit by expry, without exposing the whole 1% of my portfolio to it.

This is a highly advanced and confusing trade so I would not recommend it to beginners.