OIH case study for OCT

This case study was posted elsewhere in OCT, I am moving here to my own blog. A trader came to me with the initial position, after a substantial move. Click on each picture to see larger view. If the pictures seem fuzzy, try zooming it in your browser window by single clicking on the larger pic. See my newly available "How to read a Risk Graph" video in the video section.
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8/23 initiated 10x OCT OIH SS (iron butterfly) 130/140/150 credit 7.6 then went to sleep.

Woke up on 9/25 and OMG OIH is all of a sudden the low 120s!!!
Panic/paranoia/anger/hope/fear/greed all
set in at the same time. Not to mention the continued
pressure to make $$ regardless of timing.
Luckily the trader immediately took off 50% of the position
to cool his head so as to be able to plan out further action
in a more calm mental state of mind.

2nd action, buy to close the short 5x 140c debit filled for .45 each.
The 140c strike was originally sold for 6.8 each. The reason for
the buy back is that the 140calls have depleted 93% of its max
available value, and OIH is deemed capable of bouncing around
quite a bit. Placed limit orders to re-sell the 140c strike if it
reached 1.2 (roughly a 5pt bounce) seemed fairly possible.

Max risk $1425, breakeven at expiration, 133, 9 pts away from
the current 124 closing.

The resulting risk profile is shown below.




9/26 Proposed action, buy back the 140/130p spread to close and
sell the 130/125p spread to open as an unbalance butterfly order
125/130/140p, current market is around 5.1 debit. (the debit will be
cheaper as OIH rallies up) Several reasons for this proposed
adjustment. OIH has moved quite a bit
away from the short 140p and no decay is being enjoyed by the trader.
By rolling down the short put spread closer to the money:
1. dampens the effect of time decay against the trader
Also, by reducing the put spread width from 10 to 5
2. frees up margin
3. moves OE(options expiration) breakeven point 5 points lower
4. this manuver does not add to max risk to the down side.

If the unbalnaced fly is filled for 5.0 debit, Max risk is still $1425, but the
breakeven at expiration is moved down to 128. With OIH moving up 2
points today, the position would be only 2 points away from OE BE.

Please note how the upside profitability is morphed into extending the
lower breakeven point further.

Proposed risk graph is shown.


9/28 The trader filled the unbalanced fly adj for 5.0 debit. OIH closed at 128.6.

10/20 final trade for the OIH case study posted 8/23, buy back
5x oct 130p at .25 each, locking in about a grand profit.
OIH, with 75 min to go for OCT expiration, its trading right at 130.
No need to take chances, and am 25cents away from max profit anyhow.