Matt Baker
Matt Baker

Welcome to part 6 of a new article series on one of my favourite strategies, the Butterfly. In this week’s article, we will be looking at the Risk Graph page in a lot more detail. We will work with the same Butterfly we have been working with throughout the series, the AAPL (Apple Computers) Oct 09 155|175|195 Call Butterfly. At the time we constructed the trade, AAPL’s price was about $173, so this would be known as an ATM (at-the-money) Butterfly, because the short (sold) strikes are ATM. Let’s have a look at the top part of the Risk Graph page, with the trade leg details, trade cost/risk amounts, and Greeks.

Chart 1

click chart for more detail
click to enlarge

Have you ever looked at this part of the page, (Chart 1), and just seen a whole bunch of numbers, resembling something like a flight deck control panel? I used to when I started, but at the stage I'm at now in my trading, all these numbers actually tell me something about the trade I need to know.

Let’s go through it all. Starting at the top we have the Stock code AAPL and the company name underneath. There is a link titled Stock News, which you can click on to find out the latest company news, perhaps any important announcements like earnings, product releases or internal changes. Next to this is the amount of dividends the company pays, and if it does, the dividend date will be listed here too. Importantly too is the sector information, in this case Company and Office Equipment. You could then potentially check the sector to see if it is performing in line with the prognosis you have on your stock.

Below this we have the 3 trade legs. We will work from left to right. The first column is the leg date. It is very important to have this leg date match the actual date you get into the trade. For example if you create the trade on Oct 1st but don’t actually get filled until Oct 3rd, make sure you go back into Platinum, Edit the trade, and change the leg date. Don’t forget that when you wake up in the morning (Australian time) of Oct 3rd and find you were filled, the date you will have to enter into Platinum is Oct 2nd! As this trading day in the USA was one day earlier than Australian time.

Next we have Position and Num. These 2 columns are also vital to be aware of. Position tells you whether you are long or short each leg. When it comes to adjusting the trades down the track, you will have to be 200% sure which legs you are long and short, so you buy back the correct ones, or sell the correct ones. For example if you wanted to close the centre strikes of the fly, and to do so instinctively thought, “to close the position, ill sell off the options”, this would be WRONG! These options were short options when you opened the Butterfly, meaning they were “sold to open”, so to close them in an order, you would use “buy to close”. The Num tells you how many contracts of each leg you have. Again it’s very important when adjusting or closing a trade to sell or buy the exact numbers of contracts you need. You don’t want to be ‘naked’ any options, or leave open positions in the market when you were intending to close them.

We will continue with the Risk Graph analysis in the next part of the series.

Manage your trades!

Matt Baker