Stocks & Commodities V. 29:4 (59): Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile

Does 1 + 1 = 2 or 1?

Can I adjust a profitable long butterfly prior to expiration and if so, how? Would it amount to being a smart approach for this type of spread?

Good question. When dealing with open profits, it’s always important to consider fresh alternative positioning through the adjustment process. As far as executing goes, the simplest and a perfectly reasonable adjustment would be to lock in your profits by exiting the long butterfly in full or partially.

A return on investment of 50% to 100% prior to expiration isn’t uncommon for a long butterfly. That’s impressive in some ways, but the same profits will be a good deal less than the idealized maximum. That can be annoying. But remember the old saying: “Don’t get mad, get even.” Coupled with an appreciation for another old saying, “You get what you pay for,” traders can redirect their focus and take profits along the way rather than hold on for no good reason.

This makes a good deal of sense as opposed to simply holding onto a paper profit. Not only are butterflies generally slow to expand toward their maximum profit potential due to the razor-like precision required of shares, it’s also an unlikely outcome. Worse, those paper gains could be quick to come undone altogether. And while we may have “only” paid $0.40 or $0.50 to initiate the butterfly, lots of small losses can hurt you over the long run.