Today, I am testing out a new that I’d like to add to my playbook. The idea came from the SMB Capital blog, specifically, from Greg Loehr’s posts on the broken wing butterfly. I like the butterfly over credit spread or iron condor because the Priceline (PCLN) volatility skew, as I track it, is somewhat flat at the moment. Below is the trade I was filled on:
PCLN JUN5 630/640/645 Put Butterfly at $0.45 credit per spread
If PCLN continues higher, I will let this trade expire worthless and keep the $45 credit per spread. That equals [$45/($500-$45)] = 9.89% return on risk. If PCLN goes towards my short strikes (640), I’ll take profits at 20% return on risk or I will actively manage the position, depending on price.
The risk profile above shows the current P/L curve as well as the P/L curve at Weekly OPEX (6/30/12). For a better understanding of how the trade works, refer to the below risk profile:
As you can see, theta (time decay) kicks in fairly quickly since these are weekly options. Ideally, I’d like PCLN to move down slowly towards my short strikes.
