Butterfly Spread Question

Discussion in 'Options' started by rickf, May 11, 2007.

  1. rickf


    Pardon this stupid question, but I've never dabbled with weekly options before.

    For goofs and grins I just ran a Butterfly Spread on the XEO -- in particular this week's XEO weeklys that expire today:

    XEO currently at $688 and I ran a 685/690/695 Put Butterfly.

    Buy 10 XEO MAY 2007 685 Put (.KFBQQ) $0.15 $150.00
    Sell -20 XEO MAY 2007 690 Put (.KFBQR) $2.30 ($4,600.00)
    Buy 10 XEO MAY 2007 695 Put (.KFBQS) $7.00 $7,000.00

    Stock Price Profit/Loss
    $675.00 ($2,550)
    $680.00 ($2,550)
    $685.00 ($2,550)

    $687.55 $0
    $690.00 $2,450
    $692.45 $0

    $695.00 ($2,550)
    $700.00 ($2,550)
    $705.00 ($2,550)

    As this P&L graph reads, if I open the spread and then close it while the underlying doesn't move too much ($688 is near the $690 apex of the spread) I'd score a quick profit, because the spread expires today.

    But I temper that enthusiasm with a healthy dose of skepticism because few things in life are "that easy" or "quick." As I've never held options through expiration, I have no idea if this is a normal thing to see -- because at expiration, time decay is down to zero, right.....so all that's left is intrinsic value.

    Is there something I'm missing here, or are there tons of folks who just day trade XEO weeklys spreads on Fridays for a small profit? (Yes, that was me being sarcastic)

    Thanks for any insights or sanity checks here.

    Always learning,

  2. If you put a spread on and the market moves your way it is possible to make a profit in one day, but the chance of overcoming the bid/ask spread on all the legs is not easy. You will never be able to put on a spread and "while the underlying doesn't move too much" be able to overcome the bid/ask.
  3. rickf


    Yeah, good point -- the b/a spread can kill you....I've watched the b/a on the weeklies and some of them are absolutely NUTS.
  4. Because the SPX and OEX are singly listed the spreads are wide and the market makers are greedy. The weeklies are the worst, unless you hit the bid or take the offer you may never get filled.
  5. rickf


    Yah, I paper-traded that on Thurs and was surprised by the wide B/A spread. Ah, well. That's what paper-trading is for!