Interactive Brokers Webcast Neutral Spreads€¦ · CBOE OPTIONS INSTITUTE. 20 . Weeklys and Iron Condors . Spreads and Time Decay . Short dated options offer a ton of flexibility

Neutral Spreads

May 17, 2017

Interactive Brokers Webcast

2 CBOE OPTIONS INSTITUTE

Disclosure

Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker or from The Options Clearing Corporation at www.theocc.com. The information in this presentation is provided solely for general education and information purposes. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice. Any strategies discussed, including examples using actual price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions. Investors should consult with their tax advisors to determine how the profit and loss on any particular strategy will be taxed. Past performance is not indicative of future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this presentation is available from CBOE upon request. CBOE® and Chicago Board Options Exchange® are registered trademarks and CBOE Options Institute and Weeklys are service marks of Chicago Board Options Exchange, Incorporated (CBOE). CBOE is not affiliated with Interactive Brokers. 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. © 2017 CBOE. All rights reserved


Neutral Spreads

Outline

Iron Butterfly Iron Condor Trading Examples Summary / Q&A


Iron Butterfly

Introduction

Consists of a position in four different option contracts It may also be thought of as a combination of a bear call spread and bull put spread A call and put with the same strike price are sold Two options are also purchased – a lower strike put and a higher strike call The result is a neutral spread trade with a range of potential profitability The maximum profit would only be realized at a single price point


Iron Butterfly

Basic Example

XYZ at 50.00 Long 1 XYZ 45 Put Short 1 XYZ 50 Put Short 1 XYZ 50 Call Long 1 XYZ 55 Call

Both Bull Put and Bear Call spreads are credit spreads Iron Butterfly will always bring in a credit

Bull Put Spread

Bear Call Spread


Iron Butterfly

Trading Example

XYZ Trading at 40.00 – Neutral outlook for XYZ

Expect stock to trade in a tight range in 45 Days

Buy 1 XYZ 35 Put at 0.25 Sell 1 XYZ 40 Put at 1.70 Sell 1 XYZ 40 Call at 1.65 Buy 1 XYZ 45 Call at 0.30

- 0.25 + 1.70 + 1.65 - 0.30 = 2.80

Net Credit = 2.80


Iron Butterfly

XYZ 35 – 40 – 45 Iron Butterfly

Payoff at Expiration – Stock 35 Put 40 Put 40 Call 45 Call Credit P/L

30 35 40 45 50

2.80 2.80 2.80 2.80 2.80

5.00 0.00 0.00 0.00 0.00

(10.00) (5.00) 0.00 0.00 0.00

0.00 0.00 0.00

(5.00) (10.00)

0.00 0.00 0.00 0.00 5.00

(2.20) (2.20) 2.80

(2.20) (2.20)


Iron Butterfly

XYZ 35 – 40 – 45 Iron Condor

Payoff Diagram –

-3

-2

-1

0

1

2

3

4

35.00 40.00 45.00

Max Gain +2.80

Max Loss -2.20

XYZ 40.00

Break even 40.00 – 2.80

= 37.20

Break even 40.00 + 2.80

= 42.80


Iron Condor

Introduction

Consists of a position in four different option contracts It may also be thought of as a combination of a bear call spread and bull put spread Bull put strike prices are lower than the bear call strikes The center strike options are sold and outside strike are purchased The result is a neutral spread trade with a range where the maximum profit would be realized


Iron Condor

Basic Example

XYZ at 47.50 Long 1 XYZ 40 Put Short 1 XYZ 45 Put Short 1 XYZ 50 Call Long 1 XYZ 55 Call

Both Bull Put and Bear Call spreads are credit spreads Iron Condor will always bring in a credit

Bull Put Spread

Bear Call Spread


Iron Condor

Trading Example

XYZ Trading at 37.50 – Neutral outlook for XYZ

Expect stock in 35.00 – 40.00 range in 45 Days

Buy 1 XYZ 30 Put at 0.15 Sell 1 XYZ 35 Put at 0.90 Sell 1 XYZ 40 Call at 0.95 Buy 1 XYZ 45 Call at 0.20

- 0.15 + 0.90 + 0.95 - 0.20 = 1.50

Net Credit = 1.50


Iron Condor

XYZ 30 – 35 – 40 – 45 Iron Condor

Payoff at Expiration – Stock 30 Put 35 Put 40 Call 45 Call Credit P/L

25 30 35 40 45 50

1.50 1.50 1.50 1.50 1.50 1.50

5.00 0.00 0.00 0.00 0.00 0.00

(10.00) (5.00) 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

(5.00) (10.00)

0.00 0.00 0.00 0.00 0.00 5.00

(3.50) (3.50) 1.50 1.50

(3.50) (3.50)


Iron Condor

XYZ 30 – 35 – 40 – 45 Iron Condor

Payoff Diagram –

-4

-3

-2

-1

0

1

2

30.00 35.00 40.00 45.00

Max Gain +1.50

Max Loss -3.50

XYZ 37.50

Break even 35.00 - 1.50

= 33.50

Break even 40.00 + 1.50

= 41.50


Iron Butterfly vs. Iron Condor

Strategy Comparisons

Iron Butterfly usually takes in more income than a comparable Iron Condor An Iron Condor will have a higher likelihood than the Iron Butterfly of realizing a maximum payoff The break even points are usually wider for an Iron Condor than an Iron Butterfly

A picture may help with all this


Iron Butterfly vs. Iron Condor

Strategy Comparisons

Payoff Diagrams –


Weeklys and Iron Condors

Iron Condor

The S&P 500 is at 1857 and we have a neutral outlook for the equity market for the next four weeks Based on this outlook we check out putting on an iron condor

Buy 1 SPX 20 Day 1840 Put @ 19.30 Sell 1 SPX 20 Day 1850 Put @ 21.60 Sell 1 SPX 20 Day 1865 Call @ 19.10 Buy 1 SPX 20 Day 1875 Call @ 15.00

Net Credit = 6.40



SPX 1840 – 1850 – 1865 – 1875 Iron Condor

Payoff Diagram –

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885

SPX 1857.60


SPX 1840 Put Ask

SPX 1850 Put Bid

SPX 1865 Call Bid

SPX 1875 Call Ask Credit

5 Day 8.20 11.10 8.50 5.30 6.10 10 Day 12.80 15.00 13.00 9.00 6.20 15 Day 15.70 18.10 15.40 11.50 6.30 20 Day 19.30 21.60 19.10 15.00 6.40


SPX 1840 – 1850 – 1865 – 1875 Iron Condor

Weekly Expiration Comparison –

Why trade a 20 day spread when you can trade a 5 day spread?



SPX 1840 – 1850 – 1865 – 1875 Iron Condor

5 Day vs. 20 Day Payoff Diagram –

20 Day

5 Day

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885

5 Day 20 Day

SPX 1857.60



Spreads and Time Decay

Short dated options offer a ton of flexibility in addition to more time decay benefits Traders may actually pin point their timing on trades using various expiration dates Traders may also have more opportunities to execute trades around different outlooks


LNKD Trades

Bullish Butterfly

February 5th LNKD Closed at 237.97 just before earnings About 5 minutes before the market closed there was a long call butterfly based on a bullish outlook for LNKD

Three year summary of LNKD earnings reactions

Buy 1 LNKD Feb 6th 245 Call at 6.94 Sell 2 LNKD Feb 6th 265 Calls at 1.63 each

Buy 1 LNKD Feb 6th 285 Call at 0.32 Net Cost = 4.00

Max Min Abs Avg. Last Q 21.27% -12.93% 11.19% -12.84%

Data Source: Bloomberg


LNKD Trades

Bullish Butterfly

Long LNKD Feb 6th 245 / 265 / 285 Call Butterfly

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

235 240 245 250 255 260 265 270 275 280 285 290 295

+16.00

-4.00 -4.00

Average move

≈ 265.00


LNKD Trades

Bullish Butterfly

LNKD Closed at 237.97 Late in the day a neutral iron condor came into the market

Three year summary of LNKD earnings reactions

Buy 1 LNKD Feb 6th 225.00 Put at 4.58 Sell 1 LNKD Feb 6th 227.50 Put at 5.46 Sell 1 LNKD Feb 6th 247.50 Call at 5.82 Buy 1 LNKD Feb 6th 250.00 Call at 4.90

Net Credit = 1.80

Max Min Abs Avg. Last Q 21.27% -12.93% 11.19% -12.84%



LNKD Trades

Neutral Iron Condor

LNKD Feb 6th 225.00 / 227.50 / 247.50 / 250.00 Iron Condor

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

210 215 220 225 230 235 240 245 250 255 260 265

Average move

≈ 265.00

Average move

≈ 210.00

+1.80

-0.70 -0.70


LNKD Trades

Price Action

Daily Prices

200

210

220

230

240

250

260

270

280

11/26/14 12/15/14 1/2/15 1/21/15 2/6/15


Friday Close 263.40


VXX Trade

Bearish Iron Condor

Friday January 30th – VXX @ 36.87 VXX was up about 20% over the last five trading days Just before the market closed for the weekend an Iron Condor was placed using VXX Weeklys

Buy 1 VXX Feb 6th 33.00 Call at 0.37 Sell 1 VXX Feb 6th 34.00 Call at 0.68 Sell 1 VXX Feb 6th 36.50 Call at 1.91 Buy 1 VXX Feb 6th 37.50 Call at 1.53

Net Credit = 0.69


VXX Trade

Bearish Iron Condor

VXX Feb 6th 33.00 / 34.00 / 36.50 / 37.50 Iron Condor

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

32.00 32.50 33.00 33.50 34.00 34.50 35.00 35.50 36.00 36.50 37.00 37.50 38.00 38.50

VXX 36.87

+0.69

-0.31 -0.31


VXX Trade

Price Action

Daily Prices

20

25

30

35

40

11/10/14 11/26/14 12/15/14 1/2/15 1/21/15 2/6/15



HD Trade

Bullish Butterfly Spread

HD reported earnings after the close Monday May 18th Butterfly spread was executed mid-afternoon when HD was trading at 113.76 (stock closed at 114.33)

Three year summary of HD earnings reactions

Buy 1 HD May 22nd 115 Call at 1.11 Sell 2 HD May 22nd 116 Calls at 0.74 Buy 1 HD May 22nd 117 Call at 0.49

Net Debit = 0.12

Max Min Abs Avg. Last Q 5.69% -2.43% 3.13% 3.98%



-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

111 112 113 114 115 116 117 118 119

HD Trade


Long HD 115 Call / Short 2 HD 116 Calls / Long HD 117 Call

-0.12

+0.88

HD 114.33

Range +1.2% to +2.7%

-0.12


HD Trade


3 Year Earnings History Breakdown –


-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015


104

106

108

110

112

114

116

118

4/1 4/8 4/14 4/20 4/24 4/30 5/6 5/12 5/18 5/22

HD Trade

Price Action

Daily Prices


Earnings Reaction

Recent Highs


Neutral Spreads

Summary

Both Iron Condors and Iron Butterfly Spreads are useful trades when there is an expectation that an underlying market is going to be in a range The risk / reward characteristics differ slightly between the two spreads When selling shorter dated options there is a time decay benefit that makes Weeklys ideal for these types of spreads


Neutral Spreads

Questions / Links / Contact

Questions?

www.cboe.com/education

www.cboe.com/blogs

CBOE App

@RussellRhoads [email protected]

http://www.cboe.com/education

http://www.cboe.com/blogs

mailto:[email protected]

Documents

Interactive Brokers Webcast Neutral Spreads€¦ · CBOE OPTIONS INSTITUTE. 20 . Weeklys and Iron Condors . Spreads and Time Decay . Short dated options offer a ton of flexibility