butterflies and condors

Discussion in 'Options' started by hollowpoint, Jun 3, 2007.

  1. when using butterflies and condors, does one have to own the stock (long) or can one with no capital in the stock (short) use them also? Does this principle also apply to covered calls and puts?

    I am new to this. I don't want to buy any stock, just play the options off them. For someone like me who is short in the stock, the only strategys I know are straddles and strangles besides the simple purchase of calls and puts. Are there any others for someone who wishes to not own any shares of stock?

  2. You don't have to own stock to sell options. Cash and/or long options will be enough to cover any short positions.
  3. Butterfly Spread:
    The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately lower strike. All options must be the same type, have the same underlying and have the same expiration date.

    When they say the "sale" is that from a long (writing the option) position or is that someone in the short position buying 4 options and selling 2 of them? If this strategy works for a person in a short position, when is it best applied?

  4. LionZion


    again sorry about my english but i will try to answer.

    sell means short, it means to write the options.
    lets say you want to buy butterfly with calls on strike 100 (each strike 10 pts), so it would look like:

    +1 CALL 90
    - 2 CALL 100
    +1 CALL 110

    + means to buy (long) and - means to write (short).

    the opposite side, the one who sells you the butterfly will have exactly the opposite posision.

    butterfly are usually good to buy in the end of the time life of the options, its law risk againts high return, but its like you need to twist to the target.
  5. Re: SHORT

    I have always thought of a short position being uncovered except with cash. While if you own shares or options to protect the sale of options then you are not short but covered.
  6. I think I understand. Covered=Long, Uncovered=short. Being short, you have no investment in the stock. Long, you own the stock and write puts and calls.

    If I am correct, you must be covered to use butterflies and condors and covered calls+puts. If this is the case, what options strategies can an uncovered (short) use besides saddles and stradles?

  7. Sorry but you are getting incorrect information. You can either go long or short a butterfly with options and it it does not involve any stock position. Butterflies are spreads and by definition these spreads have limited risk and limited reward whether you are short or long.

    A long butterfly has a net debit and limited maximum risk.
    A short butterfly has a net credit and limited maximum risk.

    As long you as pay the net debit or have the margin for the short spread (difference in strikes minus credit) you can enter the position.

    You can have Iron Butterflies as well using combinations of puts and calls.
  8. if someone is in the short position, and they are are performing a butterfly and google buying calls:

    google is at 500, buy a put at 9 (500 in the money) and 1 at 2.2 (520 out of the money) and 2 at 4.8 (510 out of money)

    basically saying one is at a higher strike price and 2 are at a given strike price, and one at a lower strike price

    is this a correct example or is it a combo of calls and puts?

  9. LionZion


    I think you missunderstood again all the thing abuot short and long. Ill try to make a little order in that and then answer what you wrote.
    when we talk in "general", so long is a position of "making profit when the market is up" and short is a posision of"making profit if the market will go down". in other words you can say long is buying and short is selling. (selling in short means selling what you dont have")

    anyway, when we talk options, so to any given option there is two sides, one is buying he is long on the option, and the other side is writting the option to him, selling it to him , so he is in short on that option.

    when we talk about combination of long/short options then we get strategy. for example butterfly, this strategy have two sides like any option, one is long on that butter means he buy it, and one is short on it means he sold it to him.

    but, the butterfly is biuld up from combination of long and short options together as we showed you before. the one who buy the butter fly needs to buy one option one high strike, to sell in short two options in the mid strike and buy anoter one option on the low strike.

    what you showed has no selling only buying its not butterfly.
    if you want to buy butterfly on 510 in your example.

    long 1 call 500 = 9
    short 2 call 510 = -4.8 *2 = -9.6
    long 1 call 520 = 2.2

    total cost = 1.6
    on expiration on 510 you will get your max profit = 10 - 1.6 = 8.4
    any 511 or 509 you get 9 - 1.6
    and so on...

    sorry about my english and if u have any more question feel free
  10. A 500/510/520 put butterfly is what you described yes if you mean long 500 put short 2 510 puts and lon a 520 put.

    #10     Jun 4, 2007