Open a Butterfly PUTs combo on QQQQ on 15-May-09

QQQQ was at $33.50. Placed order for 10 contracts on Butterfly PUTs combo 19-June at strike 31, 33 and 35 for $0.49.

Total cost is $490. Potential max loss is $490 and max gain is $1,510 approx.

i.e.
Buy 10x Jun-PUT-Strike-$31 (@ $2.16)
Sell 20x Jun-PUT-Strike-$33 (@ $1.08)
Buy 10x Jun-PUT-Strike-$35 (@ $0.49)
(Butterfly combo is always at a ratio of 1:2:1).

If at expiry QQQQ is below $31 or above $35, max loss is at $0.49.
If QQQQ is between $31 and $35, there is some amount of Gross Profit. After minus cost of $0.49, to have Net Profit the break even points are QQQQ at >$31.49 or <$34.51.
Max potential profit is when QQQQ is centre at $33 which gives $1.51.


Position management.
Normally do not hold until expiry. Take profit when it is reasonable amount (e.g. 100%) or to consider cut loss when it skew towards $31 or below.
Also consider to close positions if price of Middle Leg drops to $0.25 or lower OR if its time premium left drops to $0.125.

At expiry, if QQQQ is above $35, no action needed and all PUTs expire worhtless and we will lose max amount $490. But if it is below $35, some of the PUTs (31, 33 and 35) will get exercised. Which is the reason why we prefer to close out the positions before expiry.

Summary : we are expecting QQQQ to stay within the range of $31 to $35 from now until 19-Jun and volatility to reduce or stay flat. (QQQQ is NASDAQ-100 ETF).