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Number of messages : 22
Points : 1618
Date of Entry : 2015-07-30
Year : 54

ma1 Inverse Skip Strike Butterfly with Calls

on Thu Jul 30, 2015 9:16 pm
An Inverse Skip Strike Butterfly with Calls strategy operates with the same expectations as the Back Spread
with Calls strategy and requires a bullish and highly volatile currency pair. Essentially the trader sells an atthe-money (ATM) Call to cover the expenses of the more expensive out-of-the-money (OTM) Call.

The difference with the Back Spread with Calls strategy is that with the Inverse Skip Strike Butterfly with Calls strategy the trader sells an additional Call at an out-of-the money (OTM) strike price to reduce the overall cost.
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When to do it
This strategy works best when the trader thinks that the pair is bullish with high volatility.

The set-up

  • Sell an ATM Call at strike price A (spot +0)
  • Buy an OTM Call at twice the amount of A at strike price B (spot +)
  • Sell an OTM Call at strike price D (spot +)
  • At the time of creating this strategy, the pair’s price will be at A.

Maximum potential profit
The maximum potential profit is limited to the difference between D and C plus the premium received.

Maximum potential loss
The maximum potential loss is limited to the difference between B and A minus the premium received.

Time impact
In the Inverse Skip Strike Butterfly with Calls strategy, time decay will inflict the greatest loss if the pair’s price is at B. If the pair’s price is at or below A, then time decay works in favour of the trader in order for both options to expire worthless and the trader will profit from the premium received. Time decay also works in favour of the trader once the pair’s price moves beyond C.

Best/worst case scenario
The best case scenario occurs when the pair’s price reaches D where maximum profit is earned.The worst case scenario occurs when the pair’s price does not increase as much as expected and the trader suffers the greatest loss at B.

Tips
By increasing the price of the Call purchase, maximum profit is increased. However in order to increase the price of the purchased Call, the trader must also increase the price of the sold (OTM) Call. If he chooses not to then the strategy becomes a Back Spread with Calls as there is no limit to profits. In addition, the premium becomes negative and the trader suffers a loss if the pair is bearish.

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