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Three Butterflies Worth Catching

|Includes:Apple Inc. (AAPL), BA, MMM

One of the principle advantages of trading options is that there are so many different ways of combining them to get a particular risk profile. Unlike simply buying stocks, you have the opportunity to place a more nuanced bet than just "long" or "short".

My expectation is that in the near term the market will remain in a trading channel as bulls and bears fight it out to determine the next major move. If there is a major move in the near term, however, I suspect that with all of the macro headwinds we are facing today (CRE defaults, unemployment, etc) that move will be down, not up.

 With this in mind, I have recently started filling my portfolio with butterfly option spreads. Butterflies have the advantage of limiting my downside in case the market gets ugly again, while at the same time (generally) benefiting from time decay, so if the market just chops along I am likely to turn a profit. Additionally, if the stocks do wander into the sweet spot of the butterflies anytime close to expiration they will turn into a major win. Here are three recent purchases:



Long 10 MMM Jan '11 80 calls

Short 20 MMM Jan '11 90 calls

Long 10 MMM Jan '11 100 calls

Net cost: $1.25 per butterfly



Long 10 BA Jan '10 55 calls

Short 20 BA Jan '10 60 calls

Long 10 BA Jan '10 65 calls

Net cost: $.55 per butterfly



Long 10 AAPL Jan '10 180 calls

Short 20 AAPL Jan '10 195 calls

Long 10 AAPL Jan '10 210 calls

Net cost: $ 1.90 per butterfly


All three of these companies are very solid, with proven track records and solid balance sheets. They may go down (as BA has done for the last year) but they are not going bust, and that means that with long dated options I have plenty of time for the market to bounce back if we do take another dive.


Just like a real butterfly, it's important not to hold on to these positions too tightly or all you end up with is a dead insect. If Mr. market takes a swing through your profit sweet spot, take some off the table and avoid the temptation of holding out for the huge gains -- you know, the ones that can so easily disappear during the final weeks leading up to expiration.

Disclosure: long MMM calls, BA calls, AAPL calls.

Stocks: AAPL, BA, MMM