Question about being exercised in a butterfly

Discussion in 'Options' started by kalikahuna, Jun 26, 2006.

  1. So, I have a question concerning the butterfly strategy.

    Say you do a call butterfly spread. You sell 2 ATM call options and then buy 1 ITM call and 1 OTM call. Isn't the ATM call in danger of being exercised as soon as it goes a little ITM? And then, what happens? also, when is the best time to close out your position?
  2. MTE


    No, as long as there's time value (more than $0.25 as a rule of thumb) in the option the probability of it being assigned is fairly low.

    A butterfly makes all its money in the last week so it is a trade off between more profit and higher gamma. Ideally, you want to hold it for as long as possible, Thu or Fri of the expiration week.
  3. Thanks a lot, is time value for that day/contract just the theta multiplied by the days left before expiration?
  4. Theta is far from static(linear). It accelerates as expiry approaches. Extrinsic value=otm premium. for atm and itm options subtract intrintic value(the meat) to get to the fat(time value).
  5. MTE


    As it has been mentioned above, Theta is non-linear, so you can't just multiply theta by # of days.

    If the stock is at the short strike in the last week the time decay is massive.