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I started paper trading with tradeMonster. They provide a fairly sophisticated ordering system (as do many brokerages now) and present most of the common option spreads. Tonight I decided to play around with an iron butterfly. I chose JCP and while it looked fairly flat, it also looked a bit bearish. JCP, in after hours trading was in the low 17's so I thought I'd manipulate the target price of the butterfly to be 16 to reflect the trend of the JCP stock. When I changed the target price from 17 to 16 the risk/reward went from 1.5/1 to 1/1. Another pre-order adjustment I did was I opened the range a little but (which I knew would reduce the max gain). I went ahead and set up the trade anyway because I was curious to see how it would go.
Is there a better type of spread to use that controls risk the way an Iron Butterfly does for a slightly bearish stock but provides a better overall risk/reward, or is it just a matter of spending more time fiddling with the underlying four components that make up the iron butterfly to hit upon a better risk/reward ratio?
(My first post)
Can you help answer these questions from other members on NexusFi?
Implied volatility is relatively cheap, therefore I would not trade an Iron butterfly or long a regular butterfly. This way one either receives a too small of a credit, or has to pay too much of a debit. In addition, this type of trade is fairly commission heavy, based on these reasons I would personally not open such type of trade in the current environment.
If you are slightly bearish with the current IV in the underlying, why not buy a put vertical or long a put calendar spread instead? You can skew the strikes to generate the desired trade structure that represents your outlook.
Carley Garner, Senior Strategist and Broker at DeCarleyTrading, will be monitoring this thread so that she may answer any questions that you post here relating to DeCarleyTrading products and services or Options Trading in general.
Don't get fixated on a risk:reward number. There's really no such thing as 'improving' it. Cogito ergo sum has some good ideas with a vertical on directional calendar. If you're using options with shorter time frames, I wouldn't worry about using a butterfly either because the vega risk of a short term 'fly in JCP is going to be rather small.
