Game On!!

It's going to be an interesting night as the ES is sitting pretty much at the middle of my short strike on the call BWB. So far the trade is showing a profit of $240 on about $3000 risk (SPAN margining with futures options versus a theoretical max risk of $5000). You might be wondering why it's showing such a small amount of profit given that the options expire tonight and I'm so close to the middle strike. Well that's because the strike separation between my long and my short option is only $10 on a $1100 beast. That is simply too small given the way the time value curve (bell) of an options decay (the ES can easily move 10 points intraday meaning that my butterfly can easily move out of money by days end). This is why maximum strike separation is very important if you are looking to trade a BWB from the point of view of making a decent profit from having the underlying within the profit zone and more importantly to be able to show a profit in the position as early as possible before expiration day. Also the more strike separation you have, the more protection against a big move. If you are not going to maximize strike separation then I would ensure that:

1. You get a very decent credit for the trade and
2. The trade is as far out of the money as possible (preferably greater than 1.5 standard deviation out of the money)

The reasons above is why I wasn't particularly happy with the GOOG trade that I've got on. I've got the bare minimum strike separation and I'm not really all that out of the money. As it stands, GOOG missed earnings expectations and the stock is down $20 bucks after market and is sitting awfully close to my long strike at 470 (GOOG @ $474). It will be interesting to see how it holds up when the cash market opens tonight to see whether the gap is real or will it be faded by the pros. Also interesting to see how implied volatility goes if it holds up then it probably means that the move is real and the market is pricing GOOG lower. Still I've got a decent shot now that GOOG is within striking distance of my profit zone and I do have time decay in my favour as the options expire next Friday. One thing is for certain and that is the profit on the trade is unlikely to start opening up before expiration day next week. Stay tuned for updates on the trade.