asx_UnderstandingOptionStrategies

Time decay as each day passes the value of the option

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Unformatted text preview: Profit A B 0 Loss Neutral 15 LONG BUTTERFLY Construction: Buy 1 Call at A and Sell 2 Calls at B and Buy 1 Call at C. Buy 1 Put at A and Sell 2 Puts at B and Buy 1 Put at C. Buy 1 Call at A and Sell 1 Call and 1 Put at B and Buy 1 Put at C. Buy 1 Put at A and Sell 1 Put and 1 Call at B and Buy 1 Call at C. Margins: Depends on how it is constructed. Your Market Outlook: Neutral. The share price will expire around the strike price B. This strategy is also used if your view is that volatility will decrease, the bought options at A and C provide protection for the strategy. Profit: The maximum profit will occur at the strike price B. Loss: The maximum loss for this trade is limited. The break-evens are at A plus the cost of the spread and at C less the cost of the spread. Volatility: The option value will decrease as volatility decreases which is generally good for the strategy. Alternatively an increase in volatility will be generally bad for the strategy. Time Decay: As each day passes the value of the option erodes (good). Most...
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