This post is another 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.
Last week I introduced the idea of using a broken wing butterfly for AAPL, entered into for a 50-cent, as an alternative strategy to a regular put credit spread which could have theoretically been entered into for the same 50-cent credit. All other risk, reward, break even and percentage attributes were identical for both simulated positions.
Remember, both of these trades were simulated with the options expiring this Friday, but as of yesterday afternoon, the 540-535-525 put fly was trading at a loss of $0.50 and the 530-525 put spread was trading for a $0.70 loss. What I want to point out with this is that, with the same risk/reward, etc., the broken wing butterfly performed better at this point than the credit spread did.
And today with AAPL once again beating earnings, both spreads are very likely to keep the full 50-cent entry credit since they are both so far OTM. But what I hoped you learned from this is that the butterfly can perform better when the market goes against you, and can profit for more than the credit spread that we looked at in this example if the market DOES move the way you need it to. So with a trade that “acts” pretty much like a credit spread, but can perform better and potentially profit ten times what the credit spread could, it’s no wonder that a broken wing butterfly is such a popular trading strategy.
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 commissions. 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.
No relevant positions.