Comparison of market-neutral option spreads
After working on Iron Condors for a while, I wanted to try new spreads, learn from doing and see How they work.
Last month I constructed a papermoney XLE Calendar, this month I’ll try a simultaneous GLD Calendar and wide butterfly.
As far as I can tell, If you don’t want to bet where the market is going, you’d want to place a market-neutral bet. Calendars, Iron Condors and surprisingly Butterflies can be constructed as non-directional bets.
GLD Calendar spread: BUY +6 CALENDAR GLD 100 SEP10/JUN10 116 CALL @3.18
This is a regular calendar spread, you bet that at least at the last option trading day of june 2010, the price of GLD will be between $122 and $110 . Those are the breakeven points.
At the time this was placed, you could gain close to $1,500 and lose close to $2,000. This position will need a margin of $1,920. Also you can see the order that will create this spread. You pay $27.95 of comissions.
“Wide” Butterfly: BUY +4 BUTTERFLY GLD 100 JUN JUN10 108/117/126 CALL @3.93 LMT
This is a wide butterfly. Same as the IC, I tried to be close to the calendar’s break-even points. This spread needs $1568 as margin, You can make $2028, lose $1572 and will pay $33.95 to enter the trade.
Iron Condor: SELL -10 IRON CONDOR GLD 100 JUN 10 122/124/111/109 CALL/PUT @0.76 LMT
This is an Iron Condor, adjusted to have break-even points as close to the calendar. You will use $1230 as margin. Also, the order that would create this spread is shown. Yo can make $760, you can lose $1240 and you’ll pay $69.95 commissons. I did not place this order, but is shown for comparison.
Closing the butterfly today could net over $400, closing the calendar, less than $150
If you analyze them together Margins are zero, you can get $500 or so if you close right now, very positive theta (appreciates $40 something USD every day), very negative gamma ( Delta will strongly decrease with the underlying movement), and small negative delta (value of the position will decrease $12 somehting if the underlying moves up $1 USD)
Decrease in volatility increases the profit on the wide butterfly and almost wipes out the calendar.
Memorial Day, markets closed so this reflects last friday’s close.
As the volatility kept shrinking, the calendar value eroded until it started losing money. Closing this position will lose around ($45). On the other hand, the wide butterfly kept increasing in value; closing that position would yield around $700
Here are the P/L charts:
The trend in both spreads has not broken yet. Closing this positions at the levels registered at market close today would set you back almost ($80) from the calendar. On the other hand you could make around $700 from the wide butterfly.
There is something important to note. The original spread “figure” of the calendar is totally different at this point. The breakeven points have come closer, the possible profit has shrunken significantly. By comparison, the wide butterfly is just the same as when we placed the order.
The underlying changed dramatically today to the upside. This greatly affected the wide butterfly. The calendar was affected also, but not as much. Closing today will set you back ($105) on the calendar. The wide butterfly will give you $285 after a quite substantial loss of almost $570.
Jun 14th, End Game
This is the last week of these papermoney positions. Expiration it’s just a few days away. I’ll close them at this time and be a bit on the safe side. If these were live positions with real money, I would have taken them out several days ago.
The risk that you accept to make a few more USD on the butterfly might turn into a loss and the calendar could just sink further down.
As usual for this post, here are the pretty pics: