Iron Butterfly – Free trade

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COMPANY

WMT , known as Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company, Wal-Mart Stores segment offers general merchandise, including apparel, domestics, fabrics and notions, stationery and books, shoes, housewares, hardware, electronics, home furnishings, small appliances.

TRADE OBJECTIVES

Income generation over the slow Holiday season when the market volumes dries up, and Fund Managers are hitting ski slopes or warm waters of Caribbean.

TRADING PLAN

Walmart is a stable company overall and the  stock is in trading range for last 60 days or so. There is certain amount of consolidation going on, do not know how long this will last. Therefore we are taking advantage of this narrow trading range and placing a Naked straddle or an Iron Butterfly on January options, like we did for the month of December and closed with profits.

NAKED STRADDLE

SELL 5 DECEMBER 55 PUTS = $ 1.88  ( Fridays closing prices shown here )

SELL 5 DECEMBER 55 CALL =$ 2.80  ( Fridays closing prices shown here  )

Net credit                           =$4.68   x 5 = $2340.00       

Break Even points      59.68 and 50.32   Margin requirements will vary with brokerage accounts.

The trade can be closed once a trader gains 20% profits.

Since this is a Naked straddle the trade needs to be monitored and could possibly results in unlimited losses if not managed properly. Some brokerages houses may not allow you to write naked options without protection.

IRON BUTTERFLY

Well in that case, another avenue is to buy protection and trade an Iron Butterfly. One can buy December 60 calls or December 65 calls and December 50 puts or December 45 puts -to limit risk and than you may not have the above restrictions and it will cap your losses to either side. Remember you can only lose on one side of the trade on expiration.

An IRON Butterfly has a lower profit potential than naked straddle which is more risky and only experienced option traders should trade and manage such a trade. But since you are paying for protection on either side of the trade, and insuring your maximum losses to a predetermined amount, the butterfly trades works best for risk averse traders.

An IRON butterfly trade gives a trader an income generation tool and it works best with stocks in a slightly bullish to neutral bias. Its paramount that your underlying asset remains in that range, otherwise the trade may not work.

There are adjustments and other fine tune ups and that can be done, if the stock reaches your break even points. That  however requires more Margins and further trading so one should be prepared to deal with it and keep sufficient Margins in the trading accounts. If not the trade should be closed and losses taken.