l entered a SPY broken wing call butterfly on December 26th 2013, 183.5, 185, 188, january 24th expiration, it was bought at a credit, -0.12 l expect to make maxiumum profit at 185 at expiration and for profit to increase as it approaches 185 pre expiration. it has done that with SPY only increasing from point where l bought it, I am confused as to why closing this broken wing call butterfly is costing more as the price of the underlying increases towards 185. what is the current maximum profit point? where can i check out the risk graph of the expiration and real time broken wing butterfly, or even the approximate value of the broken wing butterfly at various underlying prices?
Typically the embedded short vert in a unbalanced fly influences your daily p/l more than you'd think.
yes, the short vert is wider, so I guess thats why the broken wing is costing more to close as it moves up towards 185, yesterdays session saw SPY decrease to 182.99 at one point, so it cost less to close at -0.09 from the -0.12 credit I received when entered. when SPY was at 184.69 on Dec31 it cost -0.38 to close, at 184.5 it cost -0.27 to close. so long as it increases but remains <185, when will the opposite be true? ie be more profitable to close? is there a real time risk reward graph? expiration graph is currently meaningless I think the delta was -0.1007 when entered but wont the delta have to turn positive for a better return as it approaches 185 short?
So you've entered already and you're fixated on the max profit point. What is your plan for when SPY rallies above 185? Do you hold on until max loss? Do you exit at some smaller loss? Do you roll up?
As you have worked out - most of the graphs show what happens at expiration.....as to what happens in reality prior to this many strategies dont look as enticing. The problem you have here is that of (for want of a better term )- relative decay , and try and think about this in conceptual terms rather than pure maths .... You have 2 spreads - +183.5 to 185, and -185 to 188 These spreads react differently based on - time to expiry, skew, underlying etc.....they also react differently based on what they are worth now, and what they at best will be worth. (This is the conceptual part ) eg; the 150 spread can at max be worth 150. So if its currently at a price of .50, the most you can make is 3x your money. While at the same time the 300 spread might be worth .15 - at best you can make 20x your money. There are relative upsides downsides for each based on where you are now. One might be increasing in price, the other decreasing in price over time ever so slightly - tending toward expiry day depending on where the price is however, until expiry day....these actually sometimes make the relative trading of the spreads have different skews. (as fair value is all a relative thing usually mainly relevant to market makers at any one particular point in time relative to other options.) So - while this is a very crude way of thinking about it - for those not necessarily mathematically inclined it can help explain why options prior to expiry, dont necessarily correspond to those on expiry graphs, and you should not be fooled by them. ........... think about it in terms of what happens on expiry day IN THE MORNING if the price is at 184.99 One spread has nothing but downside, the other has nothing but upside.....do you think you will be able to unwind at position at close to a maximum profit? Why would someone take the other side of that (assuming its a stand alone trade)? The time decay for these types of strategies often only occurs AT or effectively after expiry. The joy of options!
OP asked about graph @ expiry as well as "daily" until then. I posted one, you post the other. Cheers.