Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

Unbalanced Butterfly Trade

Let’s consider an example of an unbalanced butterfly trade:

• Example 3. In early July, the ZYX index is trading at $150 per share. Your feeling is that, over the next two months, this index is going to move sideways with a slight bias toward also moving higher. To focus on the $150 price while also allowing for upward movement, you initiate an unbalanced butterfly trade.

  Trade:

  Buy 1 Aug 145 put for $1.40 per share. Cost = 1.40 × 100 = $140.

  Sell 2 Aug 150 puts for $3.20 per share. Credit = 3.20 × 200 = $640.

  Buy 1 Aug 152.50 put for $4.50 per share. Cost = 4.50 × 100 = $450.

  Net credit = $50 [640 − 140 − 450 = 50].

  Max risk = $200.

See Figure 23-4 for a risk graph that depicts this trade.

Figure 23-4.

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