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Welcome to Part 11 of my series of articles on the Butterfly. In this week's article, we will continue looking at the Risk Graph page. We will work with the same Butterfly we have been working with throughout the series, the Apple Computers (AAPL) Oct 09 155|175|195 Call Butterfly. At the time we constructed the trade, AAPL's price was about $173.
See Chart 1: The final sections of the upper risk graph area we are left to look at are the Greeks. I won’t go into these because I have already written a 15 part series just on the Greeks. You can search for them within the article archive on the Optionetics.com website. I highly recommend these for traders at any level.
Chart 1
click to enlarge
So we will now go down to the part of the risk graph where the risk graph of the Butterfly is plotted.
Chart 2
click to enlarge
There are different ways to set up the way your stock chart appears, such as having Bollinger Bands or Standard Deviation Bands appear on the chart. In the chart above, I have chosen to have 1 and 2 standard deviation bands turned on (the pink is 1 SD and the blue is 2 SD’s). The risk graph also shows Earnings and Dividends for the stock (if they don’t appear, you can turn them on in General Settings). The horizontal blue line indicates where the stock currently is now (at the close of the last trading day). This blue line also continues across to the risk graph picture, showing us where the stock is, in relation to the risk graph. There is also some information in the top right area of the stock chart telling us the recent open, high, low and close for the stock, the date of the last trading day, how much the stock moved that trading day in terms of $ and % amounts, and also the estimated next earnings date – all very useful information to use!
On to the risk graph picture now, where on the right we can see the Butterfly. We can tell it’s a Butterfly by its shape, but also by what its risk and reward areas actually look like. Note that there is a triangular mouth, which extends over to the “profit” side of the graph, and above and below the mouth area is the risk area, where the trade will lose money if the stock moves into these areas.
There are two ways to display the risk graph picture – classic view and modern view. Initially in the Optionetics education the classic view is used to understand and learn risk graphs the easiest, but when the trader is comfortable, he or she could consider switching to modern view. This can be done in General Settings, or at the bottom of the risk graph page.
The Modern view aligns the ‘Stock Price’ axes on both the stock chart and the risk graph, so in the case of our Butterfly, the trader can see how the stocks price aligns with the mouth (profit area) of the Butterfly. Naturally to make money we would want to the stock to end up in the mouth area coming into expiration. As the stock moves up and down we can potentially watch the stock go in and out of the mouth – one great way that Modern View can help with trade management.
Manage your trades!
Matt Baker
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