Iron Butterfly on Duke Energy

Iron Butterfly on Duke Energy

So the TradeCaddie Twitter Feed, which is based on TradeCaddie's proprietary Technical Analysis Engine, showed Duke Energy (DUK) as a stagnant trade. So I looked at TradeCaddie's OCW to see what kinds of Stagnant trades it showed. I settled on the Iron Butterfly.

The Iron Butterfly is a fun trade commonly placed with a Short Call and a Short Put at the same strike price, making that strike price your maximum profit, so choose wisely. I agreed with the OCW and sold to open a short call (obligation to sell) and the short put (obligation to buy) - both at $87.50. I was paid .85 for the Short Call from the Bear Call, and $1.45 on the Short Put from the Bull Put side. Details on the OCW card below

On the Bear Call side, the Long Call serves as our limiting instrument. I bought the right to buy the stock at $92.50 - just in case. If I have to sell because the stock is above 87.50, and I don't already own the stock, then I have the right to buy it at $92.50, which helps cut my losses if the strike price is above that amount.

On the Bull Put side, the Long Put serves are our limiting instrument. If I am obligated to buy the stock (short put) at $92.50 because the strike price was lower than that, then I have the option to sell it at $85.00, thereby limiting my losses.

Next, we'll take a look at the Overall Summary, and Primary and Secondary Exit Points, which TradeCaddie does for us:

How Much Can I Make?

The Bear Call Credit is calculated by TradeCaddie to be $0.75, as is the Bull Call Credit. The Total I can make on this trade is $1.50. Ping me for more details. It's good to know how this is calculated even if TradeCaddie does it all for you.

How Much Can I Lose?

Risk: $3.50.  This is calculated by how much I can lose - the difference between the strike prices, or $5 - minus how much I've offset that loss with my shorts, or $1.50. Therefore, I am risking $3.50 to make $1.50. 

What's My Return on Investment?

Max ROI is 42.86% on this trade. 

Where Are My Breakeven Points?

If it's bullish, your breakeven is when the stock crosses above $89. In other words, close the short call when the stock price reaches $89.  If bearish, then the breakeven is when it falls below $86. Close the short put when the stock price reaches $86 or take assignment of the short put to own the stock.

Summary and Explanation

Lets look at each of the options individually.
The short call - expectation is the stock will be below the strike price, so your Short Call strike price is $87.50. that means if the stock is below that then your primary exit is just let it expire. That means the person holding the Long position will not force you to sell stock to them

Now lets look at the Short Put - Expectation is that the stock will be ABOVE that strike price. Our Short Put strike is $87.50.

The perfect case scenario when you have a Short Call and a Short Put at the same strike price is for the stock to end up exactly at that stock price. Since we got paid to play that means your make profit will be the combined credit you took in.

HOWEVER you bought some LONG positions (PUT and CALL) to limit the risk in both directions. Therefore this trade is built with two thoughts in mind.

  1.  The trade will stay flat and not move very much.
  2. It will swing .. It will go one direction allowing your to close one of the short positions and then the stock will swing to the other direction therefore allowing you to close the other short position.

This trade is built more for the active trader and is not meant to expire on its own.

The intention is for the trader to exit the trade either one leg at a time or all together when it will cost them less money than they got paid.
 

 

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