From Theory To Practice

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4/18/19: Portfolio Analysis - The Problem with Free Butterflies

From Theory To Practice

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In today’s portfolio analysis, we begin by examining our Free Butterfly in CAT that didn’t work out. It’s important to remember that whenever you create a Free Butterfly, you forfeit the potential to keep the credit you collected (from the original Ratio Spread or Broken-Winged Butterfly) at trade entry, if the stock continues to rally. So while absolutely risk-free in nature, Free Butterflies are sometimes better in ‘theory’ than they are in ‘practice’.

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