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Welcome to Part 7 of my article series on one of my favourite strategies, the Butterfly. In this week's article, we will continue looking at the Risk Graph page in a lot more detail. We will work with the same Butterfly we have been working with throughout the series on Apple Computers (AAPL): the Oct 09 155|175|195 Call Butterfly. At the time we constructed the trade, AAPL's price was about $173, so this would be known as an ATM (at-the-money) Butterfly, because the short (sold) strikes are ATM. Let's have a look at the top part of the Risk Graph page, with the trade leg details, trade cost/risk amounts etc, and greeks. In the last article we looked at the stock code, news, dividend section, sector name area, leg date, Position and Num.

Chart 1


click here to enlarge

We will continue now where we left off. In the trade legs, let's look at the 4th column along entitled Option Symbol. This is one of the columns I pay the least attention to. The symbol isn't telling me anything particular I need to know, as when I then go to the option chain within my broker, I don't select the option by symbol, I go and look for the exact month and strike of the call or put I'm after. The next column Expire tells you the expiry month of the options you have. For a strategy like the Butterfly where all legs are in the same expiration month, check that the months are all the same. For strategies that are 'calendarized,' like the Calendar spread, double check you have the correct months, and around the right way too!

Next we go across to a very important area - Strike Type. Naturally this tells us whether our option is a Call or a Put, and also at which strike. The strikes are often an aspect of the trade that can be massaged around in order to get the exact risk to reward you're after. Always be in touch with this column, make sure they are the ones you want!

To the right now is Entry. This is a vitally important area. The important thing to do here is once you construct and save the trade, the entry prices saved in the trade will most probably not be the ones you get filled at. Once filled on the trade, go back into Platinum and Edit the trade, and change and Update the entry prices for each leg. Only now will your risk graph exactly replicate the trade you have on.

The Bid/Ask column naturally tells us the bid/ask of each option. I have written some other articles going into great detail on the Bid/Ask Spread, but for this purpose, the main thing to take away is to ask yourself how wide the spread is here. The spread on the short options is 6.45/6.50, showing only 5 cents worth of slippage, which illustrates the options have a tight bid/ask spread, which is good. If the spread as a percentage of the option price was wide-for example, 6.10/6.70-then you may decide not to go ahead with the trade at all because of the high slippage you would have on the way in and on the way out of the trade.

We will continue with the Risk Graph analysis in the next part of the series.

Manage your trades!

Matt Baker
Trading Tutors Team

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Recent Articles by Matt Baker, Optionetics.com.au

• March 15, 2010
  Options Corner: The Magic of Butterflies, Part 14
• March 15, 2010
  Index Trading: Let's Trade the Dow! Part 3
• February 23, 2010
  Options Corner: The Magic of Butterflies, Part 13
• February 22, 2010
  Taking the Risk Out of Calendars
• February 17, 2010
  Understanding Your Trading Psychology: Let's Take Control! Part 3