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and in person. SMB TRAINING also offers web-based, interactive training courses on demand.
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constitutes a recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product
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5.No relevant positions
6.Please note: Hypothetical computer simulated performance results are believed to be accurately presented.
However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance
record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed;
the results may have been under or over compensated for the impact, if any, of certain market factors such as
liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they
are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to
achieve profits or losses similar to those shown. All investments and trades carry risks.
3. • Weekly options are heavily traded and have enormous open interest Dwarfing most other option series
• Large numbers of investors aggressively selling time decay have depressed prices and created unusual distortions
• These distortions can be profitably traded
• The dynamics are complex and simple approaches to trading weekly options that worked just one year ago have become
obsolete
• High levels of weekly option activity distort the VIX calculation which never includes weekly options
• SPX options used for the VIX calculation represent a tiny percentage of the total number of contracts traded on the S&P 500
• Option pricing theory dramatically underprices volatility in short time frames. Over the past 100 days, NFLX averaged a
unique strike cross every 312 minutes; AAPL averaged a unique cross every 234 minutes. Their respective ATM implied
volatilities are 37% and 28%.
Unusual Dynamics of the Weekly Options Market
AAPL Strike (8/23 weekly) Calls Open Int. Puts Open Int. SPX Strike (8/23 Weekly) Calls Open Int. Puts Open Int.
465 1,804 1,929 1620 18 2,148
470 2,444 2,129 1625 10 17,109
475 2,340 3,606 1630 13 3,638
480 3,004 3,284 1635 7 1,344
485 2,420 1,907 1640 31 7,274
490 2,373 2,165 1645 29 3,136
495 3,966 1,809 1650 88 14,279
500 6,250 1,811 1655 92 5,828
505 5,981 391 1660 700 4,591
510 4,146 349 1665 1,316 820
515 6,464 180 1670 753 3,044
520 2,553 46 1675 5,560 8,589
525 1,429 72 1680 2,625 2,346
530 1,968 12 1685 1,347 1,152
535 1,082 64 1690 4,532 2,784
540 1,147 81 1695 1,971 833
49,371 19,835 19092 78,915
total 69,206 98,007
4. Short butterflies are margin-friendly, low risk, high return trades that tend to be profitable in many different timeframes. They
can generate a profit from rising implied volatility or a modest move of the underlying stock.
A typical trade might be composed of:
10 short $100 calls
20 long $110 calls
10 short $120 calls
For a net credit.
• Maximum profit of the trade is equal to the credit
• Although certain timeframes should be avoided (Thursday with 1 day remaining before expiration or the final weekend),
timing is less critical than it is for long butterflies.
• Wider spacing between the strikes makes the trade more sensitive to movement of the underlying stock but also increases time
decay cost.
• Adjusting strike spacing makes it possible to place profitable trades in almost any timeframe.
• One of the most profitable times for a short butterfly is in the final hour before expiration when the credit is excessively large
and virtually any move of the stock generates a profit.
5. AAPL $10 spaced short butterfly prices with 7
days remaining before expiration.
Stock @ 503.10
$10 Spaced
Strikes
Midpoint($)
Credit
475 / 485 / 495 -0.70
480 / 490 / 500 -1.45
485 / 495 / 505 -1.60
490 / 500 / 510 -1.90
495 / 505 / 515 -2.00
500 / 510 / 520 -1.94
505 / 515 / 525 -1.40
510 / 520/ 530 -1.16
515 / 525/ 535 -0.78
$10 move up or down generates a substantial profit.
Time decay is $0.097/day. This value will accelerate
during the week as the position credit and sensitivity
to movement also increases.
The following data was gathered at the close on Friday 8/16 for options expiring in 7 days. $10 spaced butterfly had a $2
credit and a $10 move in either direction generates a substantial profit even though we are at the beginning of the weekly
trading window.
6. Friday is one of the best days to trade a short butterfly. The distortion is greatest in the final 30 minutes when the credit
for a $5 spaced trade approaches $5.00.
The table on the left lists average open to close price changes for AAPL during the final 30 minutes and final 15 minutes
(25 expirations). The table on the right lists average high-low transitions for the same timeframes. It is clear that $5 spaced
short butterflies are profitable even during the final few minutes of trading because credits larger than $4 are common (i.e.
a $1 move is profitable).
Date
Final 30
minutes
Final 15
minutes
Final 30
AbsValue
Final 15
AbsValue
Final 30
Avg Chng
Final 15
Avg Chng
09/07/2012 0.14 0.16 0.14 0.16 2.01 1.87
09/14/2012 -1.55 -0.41 1.55 0.41
09/21/2012 -1.43 0.02 1.43 0.02
09/28/2012 -3.15 -2.70 3.15 2.70
10/05/2012 -1.43 -1.08 1.43 1.08
10/12/2012 -0.31 -0.15 0.31 0.15
10/19/2012 -4.26 -3.34 4.26 3.34
10/26/2012 -5.25 -4.58 5.25 4.58
11/02/2012 -4.71 -2.10 4.71 2.10
11/09/2012 1.49 -0.89 1.49 0.89
11/16/2012 3.69 1.98 3.69 1.98
11/30/2012 1.06 1.37 1.06 1.37
12/07/2012 -1.04 1.50 1.04 1.50
12/14/2012 1.63 2.98 1.63 2.98
12/21/2012 4.31 3.41 4.31 3.41
12/28/2012 -1.82 -3.42 1.82 3.42
01/04/2013 -2.34 -3.53 2.34 3.53
01/11/2013 -0.46 -0.65 0.46 0.65
01/18/2013 1.40 0.69 1.40 0.69
01/25/2013 -4.09 -6.43 4.09 6.43
02/01/2013 -0.14 1.48 0.14 1.48
02/08/2013 -2.79 -1.63 2.79 1.63
02/15/2013 -0.27 -0.15 0.27 0.15
02/22/2013 0.70 0.38 0.70 0.38
03/01/2013 -0.79 -1.64 0.79 1.64
Date
Final 30 min
(H-l)
Final 15 min
(H-l)
Final 30 Avg
(H-L)
Final 15
Avg (H-L)
09/07/2012 0.85 0.80 3.87 3.27
09/14/2012 3.12 2.10
09/21/2012 2.83 2.05
09/28/2012 4.08 2.97
10/05/2012 3.24 2.64
10/12/2012 1.69 1.69
10/19/2012 4.88 4.05
10/26/2012 6.42 6.42
11/02/2012 7.02 4.51
11/09/2012 4.05 3.85
11/16/2012 5.31 3.66
11/30/2012 2.22 1.92
12/07/2012 4.70 4.36
12/14/2012 4.70 4.58
12/21/2012 4.73 3.90
12/28/2012 6.14 5.32
01/04/2013 4.64 4.33
01/11/2013 1.68 1.34
01/18/2013 1.60 0.93
01/25/2013 10.92 10.92
02/01/2013 3.17 2.66
02/08/2013 3.53 2.45
02/15/2013 1.00 0.98
02/22/2013 1.88 1.34
03/01/2013 2.30 2.10
7. The following table contains prices for last week’s $5 spaced call butterfly on NFLX. Several different timeframes are included.
Description Date/Time Days Rem. Stock Price Call Strike Price Credit P&L
Mon Morning 2013-08-12 9:30 4.27 250.42 245 7.29
Open Trade 250 4.26
255 2.20 -970
Tues Morning 2013-08-13 9:30 3.27 258.84 245 14.08
Close Trade 250 9.63
255 5.88 -700 28%
Fri Morning 2013-08-16 9:42 0.26 251.20 245 6.21
Open Trade 250 1.71
255 0.07 -2860
Fri Final Close 2013-08-16 16:00 0.00 258.87 245 13.87
250 8.87
255 3.87 0 100%
8. Some of the largest profits are generated just before the close on Friday when the credit of the trade is exceptionally large and
almost no time remains before expiration. At this point in the expiration cycle, option pricing theory completely fails and the
market degenerates into pure gambling. Most retail traders incorrectly believe that the best opportunity for this timeframe
involves selling time decay.
The following example outlines prices for a NFLX short butterfly placed in the final 90 minutes before the market closed last
Friday. A move smaller than $2.00 generated a 63% profit. The large credit ($3.09) would have generated a profit at any
closing price above $256.91 or below $253.09 – a move of just $1.91.
Description Date/Time Days Rem. Stock Price Call Strike Price Credit P&L
Fri Afternoon 2013-08-16 14:38 0.06 256.90 250 6.90
Open Trade 255 1.93
1.5 hrs. remaining 260 0.05 -3090
Fri Final Close 2013-08-16 16:00 0.00 258.87 250 8.87
255 3.87
260 0.00 -1130 63%
