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Originally Posted by PaceAdvantage
3) It's not a bearish trade. In fact, it starts out as a delta neutral trade, because after you purchase the put butterfly spread, you're supposed to purchase stock or calls to bring the delta to zero. Thus, you are protected a bit to the long side (due to the stock/calls purchased) in case of a big run up shortly after you put the trade on, plus you have a lot of downside to work with because the butterfly itself is a bearish-type trade...so even though the butterfly spread alone is a bearish trade, when combined with stock or calls, it brings it to a neutral trade in terms of delta.
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OK, having been out of the game for a while, I'm having to go back to school. I wrote a simple spreadsheet to analyze the possible positions you might take according to his entry rules. With the RUT closing at 1120 today these are the numbers.
Strike Put/Call Lots Debit/Credit
1050 $14.70 1 -$1470
1100 $28.10 -1 $2810
1100 $41.70 -1 $4170
1150 $23.50 1 -$2350
Bottom line is that it generates a $3160 credit with a maximum loss of $1840.
1. Does the iron butterfly always generate a credit to begin with?
2. If I've done things right, the next step is to buy some IWM stock. What is IWM stock, is that a Russel Index fund? How much do you buy?
3. Then he says instead of using IWM stock he (buys?) deep in the money calls. Are these RUT calls? How deep in the money? How many?
I guess the numbers I'm showing are not delta neutral. You have to make that first hedge with the stock or the calls to get to that delta neutral point.
Am I on base with all of this?
