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cdcaveman

Registered: Aug 2011
Posts: 3514

08-30-12 03:09 AM

So you have a long position in the stock.. you can very easily sell the synthetic equvalent in options and lock in your gain into a conversion... is there a way to close out a butterfly respectively? if i close a buttefly in the same day i open it.. i will automatically get pattern day trade trigger.. just curious here.. is there no offsetting neutralizing trade?

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atticus

Registered: Mar 2007
Posts: 12609

08-30-12 03:29 AM

Quote from cdcaveman:

So you have a long position in the stock.. you can very easily sell the synthetic equvalent in options and lock in your gain into a conversion... is there a way to close out a butterfly respectively? if i close a buttefly in the same day i open it.. i will automatically get pattern day trade trigger.. just curious here.. is there no offsetting neutralizing trade?

Sure, if in a call fly you can close with a put fly, and vice-versa.

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cdcaveman

Registered: Aug 2011
Posts: 3514

08-30-12 04:12 AM

Quote from atticus:

Sure, if in a call fly you can close with a put fly, and vice-versa.

perfect... thanks for taking the time

the only thing is thats alot of commissions to close both spreads down wouldn't you think.

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atticus

Registered: Mar 2007
Posts: 12609

08-30-12 04:19 AM

Quote from cdcaveman:

perfect... thanks for taking the time

the only thing is thats alot of commissions to close both spreads down wouldn't you think.

Well they're rates arbs at that point so there is no need to offset. Just choose wider/narrower flies if you continue to trade the same ticker. It may get a little hairy to keep track of many embedded flies.

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quatron

Registered: Jul 2011
Posts: 63

08-30-12 04:25 AM

Quote from cdcaveman:

perfect... thanks for taking the time

the only thing is thats alot of commissions to close both spreads down wouldn't you think.

You don't have to close it. It's safe to hold it through expiration unless the stock is near one of the legs thus you could be exposed to pin risk.
Another way to understand the resulting position (long call butterfly against short put butterfly) is to think about it as two box spreads. You can close out any of the box spread if one of them is subject to pin risk and let the other expire. Or you can decompose the trade to 4 synthetics and close one synthetic against your stock to avoid pin risk. A lot of options

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atticus

Registered: Mar 2007
Posts: 12609

08-30-12 04:42 AM

Yeah, the combined short put and long call fly results in a long box at x-y and a short box at y-z. In any event, the rates-risk is on the spread differential and you have opposing rate spreads. Risk is nil outside pinning as quatron stated. If you're going to keep these on you need to learn a bit about dissection.

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