To create the 100-95-85 unbalanced butterfly, you add a short 90-85 put spread (said
another way, you sell a 90-85 put spread).
Here’s how the math works out: Notice
how the long 90 put and the short 90 put
cancel each other out? You now have an
unbalanced butterfly, in which the two long
strikes are no longer the same distance from
the center strike. The furthest O TM option,
the 85 put, is less expensive than the 90 put
you used to be long. Because you didn’t pay
as much for the furthest-out long option
(often referred to as the “tail”), those savings
were passed on to the cost of your trade,
leaving you with a net credit.
THERE’S JUST ONE THING …
By moving your furthest OTM strike $5 further out, you’ve created a gap in your protection. Your trade can now lose more than the
entry price. In this case, your trade still has
limited risk, but while the risk in your original butterfly was limited to the seven-cent
debit, the risk in your new unbalanced butterfly is limited to the extra $5 of difference
in strikes that you added, less the two-cent
credit, for a total potential risk of $4.98.
That may seem like a large change. But
if you look Figure 3, you’ll see that the
stock would have to drop from $115 (its
present price) to $85 per share or lower
to realize a max loss. You can see the risk
profile of your unbalanced butterfly on the
thinkorswim® platform by TD Ameritrade
from the Analyze tab. Create a simulated
unbalanced butterfly trade, then click on
MANAGING THE EMBEDDED
At some point, you may decide it’s no longer
worth having the additional downside risk
created by an unbalanced butterfly. As time
passes, if the stock doesn’t drop below $90
per share, time decay (theta) works in your
favor. If the 90 puts and the 85 puts are still
fairly OTM, you may find that both options
are close to worthless.
At this point, you may opt to buy back that
90-85 put spread that is embedded in your
trade for a profit. That would bring you back
to a 100-95-90 butterfly, and your overall risk
would be considerably reduced. Alternative-
ly, if the 90 and 85 puts are near worthless,
you may simply buy back the 90 put. This
would have the same effect of limiting your
risk, except you’d still be long the 85 put as a
sort of lottery ticket.
THE FUTURE: FLYING CARS
Unbalanced butterflies can change the landscape for traders looking to shift risk further
away from a prevailing stock price. You may
decide you need a trade with more or less
time to expiration. You may seek a considerably larger net credit. This is all part of
knowing your style, and trading within your
As you continue to grow as a trader, you
may want to explore unbalanced trades
where you change the ratio, rather than the
difference between the strikes. For example,
instead of a butterfly with a 1-2-1 ratio, you
may decide to sell a vertical spread using the
option strikes already within your trade. This
may change your trade ratio from a 1-2-1 to,
say, a 1- 3-2. Finally, if you’re more of an iron
condor trader, you may want to consider unbalanced condor trades. The possibilities are
endless, but at least now you know where to
begin. And take road rage out of your options.
FIGURE 3: Risk Profile of Unbalanced Fly. Your risk increases, but the stock price has to go down by about $30 for your position to suffer its maximum loss. Source: thinkorswim by TD Ameritrade. For illustrative purposes only..
For more information on the general risks of trading
and trading options, see page 37, #1– 2.
HOW TO FLY WITH
A 3-2-1 unbalanced fly is different from an
unbalanced fly where you “skip” a strike. Here’s
how to place the skipped strike fly on the
1. Start from the Analyze tab and add a simulated trade.
2. Right-click on the option chain and select
Analyze buy or sell trade.
3. Select Butterfly to place a regular butterfly
trade. Then add a vertical.
4. Change the strike prices for the butterfly
and vertical before placing the order.