Is such a trade even possible?

Discussion in 'Options' started by darkshogun, Jul 10, 2013.

  1. I commented in another post about the reliability of options spread pricing in the TOS demo. I found a great example here. Trading an AUG short put butterfly on the XPS (188/187/186) with the number of contracts -10/+20/-10. The bid is quoted at -6.20, the ask at 6.60. Volume and Open Interest are listed as N/A. You receive a credit of .20 if filled at the midpoint. This particular trade amounts to a total potential profit of $158. The total potential risk is $812. A phenomenal risk/reward ratio since there's no way the XPS will even get close to 187, much less settle in that distant, narrow danger zone. I find it hard to believe that such trades can be executed with real money. Am I wrong here?
  2. You will usually need to give up a little bit of edge off the midpoint to get a fill (otherwise why would a market maker sell you the option). For what it's worth, in my opinion selling butterflies is not a game for the retail trader, and especially so when you are just starting out. Never say never as far as where the stock price can go by expiration. I like how Charles Cottle phrased it in his excellent book Options Trading: The Hidden Reality: "I would like to make the point right now that very few speculators sell a butterfly...Very important: Speculators always buy the wings. The only people who sell the wings on a wingspread are market makers when providing liquidity."

    You should put on a real trade to get your feet wet! You can only learn so much in a demo.