This will be our first trade for the Butterfly Portfolio!
OIH is a nice, rangy play that's not likely to go up or down more than 20% but should give us good action in between so it's good for a neutral play where we sell puts and calls.
Since we think it can move 10% up or down easily we should start small so let's just sell 10 of the March $30 calls for 0.90 ($900) and 10 of the March $29 puts for 0.95 ($950) and we'll just roll the loser.
The July $26 puts are 0.80 and the $33 calls are 0.90 so those are our roll targets and our "safe" range.
Of course the key to liking a butterfly is seeing how cheaply we can protect it and we only need to protect the outside of our roll, not the whole thing so we can buy:
- Buy 15 OIH 2020 $23 puts for $1.60 ($2,400)
- Buy 15 OIH 2002 $36 calls for $2.10 ($3,150)
- Sell 10 OIH March $29 puts for 0.95 ($950)
- Sell 10 OIH March $30 calls for 0.90 ($900)
So we're into the trade for net $3,700 and we have 7 more quarters to sell $1,800 in premium = $12,600, so a lot of potential collections. We EXPECT to lose on one side, of course and we expect to have to do a 1.5x or 2x roll on the loser so it's a slow grind in the initial set-ups but we can easily double down any leg if we have to and, if we don't have to, we can collect 2-3x in profits.
The most complicated thing about a Butterfly trade is learning to be patient and letting it play out. Generally, we only make adjustments once a month, during expiration week and, even then, only on contracts close to expiration or way off track.
