Butterfly OTM

Discussion in 'Options' started by lula, Mar 30, 2008.

  1. lula


    Another butterfly problem:

    Could someone explain to me about Butterflies:

    _ does a normal PUT OTM butterfly (no BWB,. no IRON) put on with a small credit (0.12) have more risk then a debit butterfly?

    - The margin requested is 12 $ a contract. Does the margin get bigger in case the butterfly becomes ATM?

    - I was thinking to buy more contracts. I have a small trading account. ShouldLEH drop that much, the body of my butterfly (30 -20- 10) becomes ATM. should I be assigned, buying 40 - 50 contracts would the margin (margin requirements around 600- 700) be enough to deal with the situation?

    I haven't any experience wth assignment and my account wouldn't aloud me to buy 4000 LEH stocks, but if I exercise my 2 wings would I come trough with the margin or do I need to put a lot of money on side just to manage the assigment and risell the stocks immediatelly? I am tring to figgure out how an assignment works. I was teached that the maximum you can lose with a Butterfly is the premium you pay, but in this case I donot pay any premium. Maybe there is more problems with an OTM butterfly that I cant face having no experience.

    any explanetion/advice is wellcome
  2. Tums


  3. mihalich


    any butterfly is just a combination of spreads - credit or debit. if you have credit spread the maximum you can loose is strike difference less premium received. Margin requirements will not change with time as your risk is defined. If you will be assigned with ITM short leg of the spread you can close it exercising long leg (actually broker will do everything taking his commission). However exercising is unlikely if the time value of the (ITM) put is not zero (exercising Friday).