1. F L O A T I N G I N T H E N E T
BUTTERFLY IN OIL

2. NOT GOING ANYWHERE FOR AWHILE?
CONSIDER THE BUTTERFLY
• Sometimes you just need to relax. A pause to refresh and reflect perhaps.
Maybe just confusion about which way to turn. Maybe market participants
are just focused on other things. There is still money to be made.
• Situation: I’m looking for a period of sideways movement in the oil ETF - USO. I
don’t expect it to just sit there going forward, but a trendless oscillation back
and forth may present an opportunity. I can structure a trade to use one of
the well known characteristics of options for my benefit. Decay.
• USO, after moving up strongly from around mid-Dec is now hovering, digesting
the gains. I elect to purchase a butterfly spread centered just slightly above
the market in calls. I buy the 33 strike, sell twice the contracts at the 35 strike
and buy the 37 strike to complete the net and make it a defined risk trade.
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3. THIS SPREAD CAN PROFIT IN TWO WAYS
DECAY OF THE AT THE MONEY OPTIONS AND A DECREASE IN IMPLIED VOLATILITY
I’M HOPING FOR MILD FLUCTUATION AROUND 35 WHILE TIME PASSES - DECAY
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4. THERE IS MOVEMENT
BUT THE FLIGHT DOES NOT DISTURB THE MOMENT
• There is some congestion below at 34 and a small gap to fill from the previous
year a bit above my center, as well as a period of congestion around the 35 –
37 area. All in all, it seems a reasonable bet to center the trade at 35.
• USO fluctuates up and down but does not fly out of my carefully constructed
net. It doesn’t always work this way. Usually you will be tested on one of the
sides. You must decide whether to exit the trade or adjust it in some fashion.
This time it mostly behaves. Although when I notice the daily range picking up
a bit I decide to look for an exit point.
• One of the difficulties with butterflies is deciding when to profit. When you’re
not making a directional play with options you are usually trying to profit from
time passing. I need those 35 calls to decay in value . I know the 37 call will
likely be worthless if I’m right. It was cheap and was purchased for cover
anyway (to avoid being net short calls). For example, assuming a price at
expiration just below 35, the 33 calls should be worth near $2 while the 35 and
37 calls will expire worthless. However this spread cost only 68 cents.
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5. AFTER A FEW DAYS OF LARGER INTRADAY SWINGS THAN RECENT HISTORY
AND BEING AWARE THAT VOLATILITY HAS BEEN FAIRLY LOW
I BEGIN TO WATCH FOR A GOOD EXIT
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6. PROFIT TIME - PLENTY OF POTENTIAL LEFT
BUT > 38% PROFIT IN ABOUT 3 WEEKS ISN’T BAD
ANOTHER TINY TRADE BUT LARGER LEARNING EXPERIENCE
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7. TRYING TO EXTRACT MAXIMUM PROFIT MAY
ALLOW YOUR BUTTERFLY TO ESCAPE
• There is a lot of potential profit left on the table, or in the “net” in
this case.
• That’s not really the issue though. You have to make your own
assessment of how much profit to take and when. No one knows
the future. You can’t count on price inertia lasting perfectly in
alignment with the expiration date you’ve chosen.
• A sudden spike in implied volatility could also delay your profit
even if the price does not actually move too far away. Barring
other insight, you may select a specific profit/loss point or a time
to exit a trade whether it’s worked or not. Time decay is helping
but gamma risk is growing. USO looked to me like it may begin to
move more actively.
• I elected to take this profit and move on.
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