This post is the second in a series that we will be publishing over the next month , tracking the hypothetical performance of broken wing butterfly trades selected by Greg Loehr of Optionsbuzz.com.

Apple can’t go up forever.  Or can it?  This week I’ll be tracking a hypothetical broken wing butterfly on Apple Computer (AAPL) that won’t lose money if Apple continues its bull run, but let me first recap the SPX butterfly we looked at last week.

The first hypothetical SPX butterfly was designed not to lose if the market didn’t sell off in spite of the news of slowing growth in China.  The butterfly in question was the 1360-1355-1345 put fly for a 30-cent credit using the options that expired March 30, and a drop in the market would have been great for this trade.  But the market really did nothing but chop around and move a little higher over the week.  So Friday the options all expired worthless and the hypothetical profit for this trade is the 30-cent credit less the entry commissions.  Remember, the trade didn’t have to be closed since the options expired worthless and out of the money.

With a risk in this trade of $4.70, and profit of 30 cents, then I calculate the hypothetical profit to be 6.4% in one week.  Nothing to write home about.  But making 6% on your money in one week when the market didn’t do what you wanted??  Maybe that IS worth writing home about.

Let’s look at a similar hypothetical trade this week, but on AAPL.  Picking the top in AAPL, I think, is not a worthwhile endeavor.  But if one decided that AAPL might have a pullback coming, then a broken wing butterfly could be a trade worth watching.

If the stock happens to drop over the next week, it could find support at $580, unless that is, the stock wants to fill that gap.  That might be TOO much of a good thing.  So I’ll just have to keep that in mind while I watch the 585-580-570 put broken wing butterfly using the options that expire next Thursday (remember, markets are closed for Good Friday). Just like a regular butterfly this trade is constructed on a buy 1, sell 2, buy 1 ratio, and the entry price I’m tracking for this trade is a 5-cent credit.

So if AAPL does indeed continue this meteoric rise, then no harm comes to the trade.  But if the stock drops, or even hovers around $600 for a few days, then this fly can start to work out.  Over the next several days I’ll be monitoring this trade and analyzing the option chain to determine the best possible exit.  So stay tuned for any updates, and any other potential trading ideas that might pop up over the next week.

Trade safe!

Greg Loehr

Optionsbuzz.com

Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commisions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.

Risk Disclaimer

No relevant positions.