Risk and reward metrics
- Net Premium: Credit of $500.00 USD.
- Margin Impact: 1,757.02 EUR.
- Max Risk: -$2,000.00.
- Max Profit: $3,000.00.
- Breakeven: 15,030.00.
- Buy 1x Call at a 14975 strike.
- Sell 2x Calls at a 15000 strike.
- Buy 1x Call at a 15050 strike.
1. Risk/Reward Profile:
- Your maximum risk is capped at -$2,000. This is the most you can lose, and it would occur if the index rises above the highest strike price (15050) or falls below the lowest strike price (14975).
- Your maximum profit of $3,000 would be achieved if the index settles right at the 15000 strike at expiration. This is because both of the sold calls would expire worthless, and you'd keep the entire net premium received, plus any intrinsic value from the 14975 call.
- You'll break even if the index is remains below 15,030.00 at expiration.
2. Strategy Bias:
This strategy profits from a moderate rise in the underlying index, up to the strike of the sold calls. Beyond that, profit tapers off but remains until the index hits the highest bought call strike. Given this, you have a bullish to neutral bias on the Nasdaq 100 Index until expiration. This bullish bias is indeed the case if you target the max profit, which is currently well above the Nasdaq 100 index-price (at the time of writing 14265).
However, personally I see this as a bearish strategy with a bullish "insurance" cushion. Given the fact that you received a nice credit when opening the position, if the price continues downwards you get to keep the received credit ($500), which is already a nice yield relative to the required margin. If the price goes up (contrary to your view), it first needs to pass the sweet spot at 15000, which could yield you the maximum profit (near expiration), before turning into the max loss if it rises further.
3. Profit Zones:
- Below 14975: The loss is capped at the net premium received ($500) minus the difference in the strike prices of the bought calls (75 points or $750), which totals -$250.
- Between 14975 and 15000: Profit rises linearly, reaching its peak at 15000.
- Between 15000 and 15050: Profit starts to decrease but remains positive.
- Above 15050: The maximum loss of -$2000 is realized, which is due to the net cost of establishing the position (including the initial credit) and the increase in intrinsic value of the highest strike call.
4. Other Considerations:
- Liquidity: Ensure that the options have good liquidity to avoid significant bid-ask spreads which can erode profits.
- Expiry: This strategy will achieve maximum profitability near expiration if the index is near the 15000 strike. Monitor the position as the expiration date approaches.
- Adjustments: If the index moves significantly before expiration, you may want to adjust your position to lock in profits or minimize potential losses.
5. Closing Thoughts:
This broken wing butterfly is an interesting strategy if you're moderately bullish on the Nasdaq 100 Index. It offers a decent potential reward for a defined risk. However, like all options strategies, it's essential to monitor the position and be prepared to adjust if the market moves against you.
In light of the strategies outlined above, it's evident that the heightened volatility in the market provides a fertile ground for options traders. As the Nasdaq grapples with turbulence, the silver lining emerges in the form of lucrative option premiums. These premiums, reflecting the uncertainty of the times, become the bedrock of our strategies, allowing us to transform potential risk into tangible rewards.
The strategies presented - whether bullish, neutral, or bearish - serve as tools in our arsenal, geared to capture value from the increased premiums. Not only do they offer a defined-risk approach, ensuring we never bite off more than we can chew, but they also position us to benefit from the swings of the market, be they up, down, or sideways.
In conclusion, as the adage goes, "In every crisis, there's opportunity." For options traders, this truism manifests in the form of high premiums during tumultuous times. By employing the strategies discussed, one can navigate the rough seas of the Nasdaq, anchoring their portfolio with the weight of well-calculated decisions. In these times, it's not just about braving the storm, but about setting sail and harnessing its power for our gain. So, as you ponder your next move, remember: the stormier the market, the richer the premium. And therein lies our golden ticket.