Welcome to part 9 of a new series of articles on the Butterfly. In this week’s article, we will continue 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. Let’s have a look at the top part of the Risk Graph page, with the trade leg details, trade cost/risk amounts etc, and Greeks.
click to enlarge
We will continue now where we left off. In the trade legs, let’s look at the 3rd column from the right, named Vol. This represents the volume traded on the last trading day – how many contracts were traded (not the shares). The column next to it, OI, is the Open Interest. This column is the total number of contracts which are out there in the market, held by traders (and un-exercised). If during the life of the option a contract is exercised by its holder, this column will reduce by that amount. A high OI number, in the high hundreds or even thousands normally represents good liquidity. The real representation of good liquidity though is a tight bid/ask spread. If the option has very low OI, check if there’s been an event which may have caused this – for example a recent dividend payment where a lot of contracts were exercised or perhaps the option month has only just been opened, meaning not many contracts have been traded yet.
The far column to the right is the days to expiration of the option. In the example above, with 38 days to expiration, we can tell that this is not the front month option (as there are less than 38 days in a month). There would be a September option, with approx 7 days until expiry, and our October option with 38. Note that in a calendarized trade (e.g.: calendar spread), a trade that uses options with different expiry months, the risk graph will be drawn only until expiry day of the shortest term option.
If that option expires worthless (and the trade continues), you will need to go into platinum and put in the reverse order (e.g.: buy it back if it was a sold position) and make the price of this order $0. This clears the option out, as far as the accounting goes. Then the risk graph will now reflect the trade legs left, the picture correctly drawn, and the numbers (debit, profit, risk etc) correct too.
Remember when closing an expired leg in Platinum, when you go to the Risk Graph page and click EDIT, don’t just change the option that was originally a SELL to a BUY. This confuses platinum and in its accounting it wont know that you originally sold one – it will just think you have bought that option. To do this correctly, you must add a new line – a new leg, which you can do lower down the page, enter the same details as the original leg (strike, month, amount of contracts etc), but enter the opposite transaction type (buy or sell).
We will continue with the Risk Graph analysis in the next part of the series.
Manage your trades!