The Unbalanced Butterfly

by Jeff on January 11, 2011

Finally! I’ve been talking about it enough and now the video is here! Taa-Daa! Look under New Downloads on the far right column: it’s called “Video – Unbalanced Butterfly”. It’s not the best video, since I had to record it twice and I still don’t feel I covered everything, but it should help a lot in getting you started with this type of spread.

Example of an Unbalanced Butterly Risk Graph

It’s not for every trade, and I wouldn’t hang my hat on this spread working in all situations. What I like about it is using it for Weekly Expirations; where you think the stock will move from the current strike up/down to the next strike. You would set your short strike on the spread at the target strike you feel the price will move to and wait a day or two to see if it moves in the right direction. If it does, you can bag a nice chunk of change.

One thing that I experienced entering these spreads: I have to wait quite a while for TOS to actually fill all the strikes. In a few cases I had to move my Limit price to the ‘Natural’ price in order to get in. So far, that has not eaten into my profits to any objectionable degree. Just remember that if you try these and you have TOS as your broker. Of course, when I was testing them using OnDemand, they executed just fine.

Profit Tent Portfolio™

Yesterday I ‘Condorized’ my IWM Bear Call by adding a Bull Put at 76/74. Basically, Condorizing by my definition is legging into an Iron Condor by initially selling a Bear Call or Bull Put, and then adding the other leg (Bull Put or Bear Call) in the future – thus creating an Iron Condor.

I also added an Iron Condor on OIH yesterday. Now, for this month anyway, my PTP™ is all Iron Condors and doesn’t have any tent-like appearance, but rather looks kind of flat and boring. I’ll take boring if it makes money. I wasn’t happy earlier with the Implied Volatility of the options for February in order to do any Calendars. Besides, I am experimenting with the long options on Calendars with farther out expiration dates. More on that later, of course.

January 2011 Profit Tent Portfolio™ Risk Graph (click to enlarge)


  • Darrin

    Hi Jeff,nWhat is the best video recording software to use that won’t break our banks, but will allow us to record our trades so that we can improve on them.n

    • Jeff W

      Darrin,nnA lot depends on what bank you might break and what you ultimately want to do.nnI use Camtasia from Techsmith. It’s a full featured video capture software and it costs $300.nnAnother product from Techsmith is Jing – probably best suited for what you want to do and it’s free. Check it out at u25ba

  • Martin

    I watched this video again while you are basking in the warmth of the Florida sun and in the victory over my beloved Chicago Bears. I placed a similar trade before the market tanked, the unbalanced Put Condor, I hope the plateau on top of the hill gives theta a little more time to work.

    • Jeff W

      Martin,nnYeah man, sorry about da’Bears. Just like trading, there are winners and losers, but don’t let the losses get you down. Look what happened the week before on the kickoff the Packers let the Atlanta draw first blood. That’s enough for many people to take their ball and go home.nnAnd, regarding unbalanced Butterflies – I got burned on AAPL with a trade I put in on Thursday, hit the road and felt sick when I heard what the marked did. Maybe do this deeper ITM? Oh well, I’m picking myself up and dusting off. Heading to the beach. Stay warm!nnu25c4Jeff u25ban

  • Colin

    Jeff,nnI enjoyed the video! You mention in your write-up that you are starting to play around with some multi-month calendars which is also something that I have started. However, what I am struggling with is how to record the profit/loss for a given month on these spreads. Would you mark-to-market the back month long when you roll the short strike to the next month to get a profit/loss calculation for the month on the spread?nnAny insights would be helpful.nnColin

    • Jeff W

      Colin,nnI like the Capitalist Ninja email.nnI have been using the TOS ThinkOnDemand feature to test Calendars using back months with expirations at least 4 cycles out. The intent is to hold the long back month and roll the front month for continued credit. I just can’t get these to work. I hear the ‘experts’ at TOS constantly talk about using LEAPS (for example) for the back month and implying it’s better. Even Terry Allen of runs successful portfolios using that strategy. But I can’t get it to work.nnWhat I have experienced but not tried live, is using a back month 3-4 months out just because the is less decay, but usually they cost more because of the higher IV.nnBack to your question. To me, using LEAPS and hanging on to them to roll is a lot like a Covered Call. Your LEAP is the stock and you are selling options against that LEAP. The purpose of the LEAP is the same as stock – bring the cost basis down. Accounting for month profits for Covered Calls if you are holding the underlying is a bit cumbersome. Heck, even when you look at your account balance it looks like poop!nnHere’s what I would do: if you hang on to the LEAP, figure out what your total net credit was for that underlying based on the cost basis of the LEAP.nLet’s say you entered this trade on the 1st of month 1:nBuy XYZ LEAP = 7.80 debitnSell XYZ month 1 option = 1.20 creditnXYZ option expires worthlessnSell month 2 option or .90nEOM month 1 profit = (1.20 + .90) / 7.80 = 26.9%nXYZ LEAP Cost Basis is now 5.70nRoll month 2 option to month 3 option net credit = .30nEOM month 2 profit = .30 / 5.70 = 5.3%nXYZ LEAP Cost Basis is now 5.40netcnnThat’s my insight. That and $3.00 will get you a gallon of milk.nnu25c4Jeffu25ba

  • Allan

    Hi Jeff – nQuestion for you on double calendars. Do you always enter the trade with a put calendar on the bottom and a call calendar on the top? If so, why do you think that is better than having a call on both top and bottom or a put on both top and bottom?nnThanks again – - Allan

    • Jeff W

      Allan,nnGood question. Mostly, it doesn’t matter – prices are about the same and really, the Put Calendar (in theory) is/should be a bit cheaper.nnThere is a slight risk on a Call Calendar that is deep ITM of being called and having to deliver the underlying for the strike price, but you can buy the underlying using your long Call and have it be the same as closing the position. Thinkorswim does this automatically. I have had Butterflys that were deep ITM and they have sent me an email that I was assigned, but what really happens is the short strike is protected by your long positions and the spread just closes. Of course, in these cases you take a loss.nnu25c4Jeffu25ba

      • Jr333

        Hi Jeff, Do you have of set of rules/criteria for trading stocks up to their earnings date? I’ve just made a nice trade on AAPL, which announces earnings on the 18th. Got out today with a nice gain. Would appreciate any ideas you can share regarding how to find these stocks with options. I trade 1 strike ITM – 30 days out. Hold until weakness OR get out day before earnings announcement. Many thanks,

        • Jeff W

          JR,nnNo, I don’t actually. There are a couple of reasons. First, earnings are high risk situations. There is enough risk out there without earnings announcements. In my ignorance, I have attempted to play earnings on PCLN and AAPL only to end up losing a lot of money. I let this up to the big guys. Here is the second and not so obvious reason. Things get pretty frantic on the popular earnings play stocks (like AAPL, GOOG, PCLN, BIDU etc.) just prior to and just after the announcement. You can be rich one minute and broke the next. Getting your order executed (if at all) at the price that you want is rare. Because of the post and pre market activity on the underlying, volatility when the market is open is all over the place. Like I said, I leave it up to the big guys.nnRegarding your trade on AAPL, you were smart to get out today. I also did an unbalanced butterfly on this weeks expiration. Opened it on Monday and closed on Tuesday for a very nice gain. I had no regard to earnings – only that the stock would move in my direction in a few days. I would NOT hold into earnings. I won’t play AAPL next week post earnings. It usually take a few days for it to settle down and indicate a direction. I’ll just wait until the following week.nnRegarding how to find them – I don’t know of any list that has earnings dates for optionable stocks. There may be one out there, but I haven’t found it. The main reason is I only trade a certain list of option stocks and ETF’s (I refer to it as my A-Plus list). I’m not interested in anything else, so I’m not out there scanning for this or that.nnu25c4Jeffu25ba

          • Jr333

            Hello Jeff,n Thank you for your reply. Very helpful. I’ve learned it is critical that you exit your option trade the day before earnings. Implied Volatility is usually very high going into earnings. After earnings, the options IV drops, so your option drops with it, hence exiting the trade the day before earnings. (Like all other trading ‘rules’, anything can happen.)nn

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