Butterfly Option Trading: MCD
Butterfly Option Strategy for MCD
Just added a new option trade in my personal portfolio today.
It’s a classic butterfly spread on MCD – McDonald’s.
The trade was Buy 2 April 70 puts, Sell 4 April 75 Puts, Buy 2 April 80 Puts for a debit of 3.11 per spread or a total cost of $622.
It’s a cheap trade that will make money if MCD stays between 73.12 and 76.92.
Here’s the graph:
The option trade has a 48% probaility of profit at expiration. But I don’t want to stay until expiration. I want to make 10-20% and get out within 2 weeks. This will happen if MCD stays where it is, or if the volatility in MCD options goes down.
With the end of the quarter coming up next week I am expecting the markets to go strong and higher into April. That will result in a drop in volatility and hopefully a quick profit.
If this option trades needs an adjustment, I will add a second butterfly of the same size at either 70 or 80 when it hits the breakeven point on either side.
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Too narrow a spread between $73.12 and $76.92 for me. I like the bigger spreads like the condors or credit spreads and even though you want to bail before expiration, one good day and you are cooked or having to do an adjustment. I don’t mind the adjustments, but like to keep them to a minimum. I am now going to go look at MCD for a credit spread and see what I get.
Not enough days left to do a credit spread. I normally trade MCD every month – a cross between a condor and a butterfly – but with the low vol, it has only made sense to do a credit spread, and even then it only yields 7-8% if done about 35 days to expiration.
Let us know if you make a adjustment. I have MCD in my stock portfolio. I wish the 48% was higher for sucess. Thank You for the trade, will be watching it.
I will paper trade, and watch the trade. Would like the forty eight per cent to be higher. Thank you for the trade.
I’ll give it a run & check the #’s later today.
As of Friday’s close, the 75 fly would cost $3.15 for a BE range of 73.16 76.86. Max profit at the 75 strike (if held to exp day)is approx $180 for a 57% ROI.
With a April/May 75 Calender Call Spread, (with a +1 IV skew),the cost is .83 for a similar BE range: 73.4576.46. Max profit at 75 strike is only $62 (compared to $180 for 75 fly), but the ROI is 75% (compared to 57% ROI for fly).
So here’s the $64 question: given these two ‘range-bound’ option strategies that offers nearly idential BE profit ranges, would it not make ‘more’ sense to go for the 75 Cal, given it’s purported superior Risk/Reward profile, in addition to savings on comm (2 leg vs 4 leg spread)?
Plz enlighten me – esp. on how decrease in IV affects Calender spreads.
Great question. I answered it in a seperate post.
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Sorry for the late comment-had to think about it for a while(not so much the trade as the adjustment). If you have to make an adjustment if the price hits $73 then you have an iron condor with the short strikes at $70 and $75 and if the price his $76 then you have a condor with the short strikes at $75 and $80 is this correct? In the last month MCD has traded in a range from 73 to 76.74 closing prices which would place the condors in a higher probability of making a profit. Since my option commissions are on the high side and the commission cost of adjustments can eat into profits would it have made more sense to do the condor to began with. I do not have access to the option prices of MCD on the dates the butterfly was setup so I cannot know how much of a credit that would have been received;however in case of adjustment that is what a person is going to have-a condor. Since you believe MCD is in an uptrend what about a BWB skewed to the upside. If I am thinking right it would be a wider put credit spread against a narrower put debit spread. The problem with these type of equities(MCD) is the point spread between the strikes-I am partial to equities that only have $1 point option strike spreads and an option chain that is a lot deeper than MCD’s. One guy by the name of Harvey rolls his butterflies into condors anyway and than another guy by the name of Mark rolls in the long strikes on a butterfly to decrease margin and keep a higher profit profile-just ideas to think about! Hope you read this at such a late date and I would like to hear your thoughts.
Yes, the simplest adjustment is just to add a second butterfly if it hits a breakeven point and then I would have an iron condor. (If I did the adjustment in calls while the original fly was in Puts). In this case i thought the butterfly was better because the premium I was getting for the 80/85 calls was very little. The fly also allows you to get out of the trade much faster is Vol drops quickly. And the ROI is alot higher. The drawback is the smaller range of the trade and thus lower probability of profit.
A BWB would work too, but those are now charged margin on both sides, so the ROI is half of what it used to be.
Since this trade is on the blog, I am trying to keep it as simple as possible. Every trader has his/her own trading style. I am a simple person so I like to keep my trades simple too.
Correction-missed the short strike if MCD hit 76-the short strike for the condor would be at 80 with the long strike at 85!
That adjustment is pretty slick… adding a 2nd fly changes the position to look like an ic. Granted, the downside gets a little steep. I’ll have to read your follow up regarding the question “why not put on an ic in the first place”.
I am starting to question the value of putting these spreads on equities. Seriously, what if somebody chokes on a chicken bone next week at MCD?..?
In fact, that is why I’m turning to option credit spreads because I don’t even like holding equities overnight anymore
That’s why we trade large companies, why you dont put 100% in any one trade, and why you know the max loss going into the trade.
Genius, Outrageously great original explanation, exceptionally good follow up questions and exceptionally great answers to those questions. You have obviously attracted an elite group of readers/followers who appreciate your thorough approach to teaching. My simple take, the more we investors understand how trading works, the better off we are. Understanding the rules fully, then allows the informed investor more time to concentrate on the underlying asset. Thank You for your help.