Synthetic Alternatives

This area includes many of the typical theoretical "hockey-stick" graphs (risk profiles) presented in the pamphlets put out by exchanges, banks, and brokerage houses, and in other books on options, as well as on many web sites. A good one can be found at The Options Institute ( If you are still challenged by the basics, stop reading and come back to this point when you are ready. This book will be patiently waiting. Rather than reinvent the wheel, the following hockey stick graphs in this chapter are provided as a reference for the synthetics that apply to them. The vertical-axis represents the potential profit and loss as the underlying price changes along the horizontal-axis. The horizontal dashed line in each profile represents the break-even level. There is profit in the region above and loss in the region below the line. It should be made clear that when discussing a position, like long a 50 call it can refer to the risk profile of one of two positions: a long 50 call (+50c), or a spread combination of long underlying and a long 50 put (+ u / +50p). Both positions are virtually identical and have the same risk profile.

There are many ways to skin a butterfly and 10 examples will be demonstrated here. But why now? Why discuss advanced strategies here at this early of a stage before understanding perhaps a lot more first? So many people, when first introduced to options, go off half-cocked and ready to fire, but what they do is set fire to their wealth. Perhaps this preview will keep the fires contained.

Examine Long 10*50 butterfly18 or +10*45/50/55 butterfly, meaning that the position is +1*45 / -2*50 / +1*55 butterfly, 10 times. Details of whether it is a call butterfly or put butterfly or iron19 butterfly are not specified because they all have the same basic expiration butterfly risk profile as shown in Exhibit 1-11.

This, 'long the wings', butterfly risk profile can result from an infinite amount of contract combinations. What follows is a list of 10 examples of long "the wings" 45/50/55 butterfly, 10 times.

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