Dan Sheridan

Income Generation Series: Butterflies vs Calendars

Jul 26, 2011

Sheridan Options Mentoring, Inc. www.SheridanMentoring.com

Disclaimer
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation at www.theocc.com. The information in this presentation is provided solely for general education and information purposes. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions and other transaction costs have not been included in the examples used in this presentation. Such costs will impact the outcome of the stock and options transactions and should be considered. Multiple leg strategies involve multiple commission charges. Investors should consult their tax advisor about any potential tax consequences. No statement within the presentation should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, statistics, or other technical data is available from Sheridan Options Mentoring at www.sheridanoptionsmentoring.com. Chicago Board Options Exchange, Incorporated (CBOE) is not affiliated with Sheridan Options Mentoring or OptionNet. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-CBOE product or service described in this presentation.

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Outline
Butterfly versus Iron Condor Wing Span of Butterflies Delta comparison at the beginning of the trade Which strike with Calendars? Scaling or full capital Managing these trades during volatile Months?

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Butterfly versus Condor

Date: 7/22/2011
Iron Condor
SEP(56)
Options 200 195 175 170 Calls Calls Puts Puts Price $0.34 $0.89 $1.83 $1.07 Delta Trade 7.6 16.8 -22.3 -13.9 +10 -10 -10 +10 Options 195 185 185 175 Calls Calls Puts Puts

IBM Price: $184.59

Iron Butterfly
SEP(56)
Price $0.89 $4.08 $5.18 $1.83 Delta Trade 16.8 49.9 -49.6 -22.3 +10 -10 -10 +10

Delta Gamma Theta Vega Credit Margin

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-8.5 -17.2 17.6 -134.3 1,310 3,690

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Delta Gamma Theta Vega Credit Margin

-56.4 -22.9 23.2 -179.2 6,535 3,505

Butterfly versus Condor

Date: 7/22/2011 IBM Price: $184.59

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25 days in Future (August 16)

Date: 7/22/2011 IBM Price: $184.59

Butterfly

Calendar

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35 days in Future (Aug 26)

Date: 7/22/2011 IBM Price: $184.59

Butterfly

Calendar

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Calendars
Criteria Low Implied Volatility Easier to manage ( 2 legs only) Easier to execute How to handle implied volatility increases?

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Butterflies
Criteria Best implied volatility environment Harder to manage ( 3 legs) Harder to execute and more commissions Handling implied volatility increases?

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Butterfly Wing Span IBM

Date: 7/22/2011
10 Point Strikes
SEP(56)
Options 195 185 185 175 Calls Calls Puts Puts Price $0.88 $4.05 $5.20 $1.84 Delta Trade 16.7 49.5 -49.9 -22.4 +10 -10 -10 +10 Options 190 185 185 180 Calls Calls Puts Puts

IBM Price: $184.56

5 Point Strikes
SEP(56)
Price $2.05 $4.05 $5.20 $3.15 Delta Trade 31.5 49.5 -49.9 -34.7 +10 -10 -10 +10

Delta Gamma Theta Vega Credit Margin

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-56.5 -22.9 23.3 -179.6 6,530 3,470

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Delta Gamma Theta Vega Credit Margin

-31.3 -6.9 6.7 -53.3 -4,050 950

Butterfly Wing Span IBM

Date: 7/22/2011 IBM Price: $184.56

10 Point Strikes

5 Point Strikes

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Butterfly Wing Span RUT

Date: 7/22/2011
50 Point Strikes
AUG(28)
Options 890 840 840 790 Calls Calls Puts Puts Price $1.70 $17.65 $19.85 $5.80 Delta Trade 9.8 50.4 -49.5 -18.0 +4 -4 -4 +4 Options 880 840 840 800 Calls Calls Puts Puts

RUT Price: $839.15

40 Point Strikes
AUG(28)
Price $3.13 $17.65 $19.85 $7.50 Delta Trade 15.7 50.4 -49.5 -22.6 +4 -4 -4 +4

Delta Gamma Theta Vega Credit Margin

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-37.1 -3.1 113.8 -337.0 12,000 8,000

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Delta Gamma Theta Vega Credit Margin

-31.5 -2.2 81.8 -238.8 10,748 5,252

Butterfly Wing Span RUT

Date: 7/22/2011 RUT Price: $839.15

50 Point Strikes

40 Point Strikes

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Wing Span Considerations

Breakeven difference versus capital? Implied Volatility environment? VIX level Look at graph 15-20 days in the future Market Volatility

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Delta at Beginning of Trade

Date: 7/22/2011
AUG(28)
Options 840 Calls Price IV Delta Trade 50 -9 Price $17.50 19.3%

RUT Price: $838.95

SEP(56)
IV Delta Trade 51 +9 $26.65 20.6%

Calendar

Delta Gamma Theta Vega Debit

8.1 -2.7 71.3 345.0 8,235

-37.1 -3.1 113.8 -337.0 12,000 8,000

AUG(28)

Iron Butterfly

Options 890 840 840 790 Calls Calls Puts Puts

Price $1.70 $17.65 $19.85 $5.80

Delta Trade 9.8 50.4 -49.5 -18.0 +4 -4 -4 +4

Delta Gamma Theta Vega Credit Margin

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Delta at Beginning of Trade

Date: 7/22/2011 RUT Price: $838.95

50 Point Strikes

40 Point Strikes

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Deltas at Beginning of Trade

Why butterflies are always short deltas? Is that bad to be short deltas in a butterfly? What to do about the short deltas?

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Which Strike to use for Calendars?

Date: 7/22/2011
AUG(28)
Options Price IV Delta Trade 51 -4 Price 1345 Calls $21.40 14.2%

SPX Price: $1345.40

SEP(56)
IV Delta Trade 52 +4 $30.65 14.4%

Delta Gamma Theta Vega Debit

1.3 -0.9 42.7 245.9 3,700

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Which Strike to use for Calendars?

Date: 7/22/2011 SPX Price: $1345.40

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Better to Lean Long Deltas?

Date: 7/22/2011
AUG(28)
Options Price IV Delta Trade 43 -4 Price 1355 Calls $16.10 13.8%

SPX Price: $1345.40

SEP(56)
IV Delta Trade 46 +4 $25.25 14.1%

Delta Gamma Theta Vega Debit

11.0 -0.9 39.1 250.5 3,660

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Better to Lean Long Deltas?

Date: 7/22/2011 SPX Price: $1345.40

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Scaling or Full Capital?

Date: 7/22/2011 SPX Price: $1345.40

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Market Recently Dropped like a Rock!

Date: 6/15/2011 SPX Price: $1265.42

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Only use Half your Normal Size

Date: 6/15/2011 SPX Price: $1265.42 -22.45
-2.08 SD
AUG(65)
Options 1370 1360 1110 1100 Calls Calls Puts Puts Price $2.95 $4.00 $8.35 $7.55 Delta Trade 9.0 11.4 -11.3 -10.3 +5 -5 -5 +5

Delta Gamma Theta Vega Credit Margin

-7.1 -0.3 14.9 -119.7 925 4,075

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Only use Half your Normal Size

Date: 6/15/2011 SPX Price: $1265.42

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Dan Sheridan
+1-800-288-9341 info@SheridanMentoring.com

Sheridan Options Mentoring, Inc.

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