Although we could cash out our bullish butterfly spread now for at least seven times what we paid for it in late January, I’m recommending playing this position down to the wire for a potentially much bigger payoff. At yesterday’s closing marks, the March 840-860-860 ‘fly was selling for 1.70 ($170); we paid 0.20 ($20) for it with the stock trading $90 lower. This gambit offered us a cheap way to bet that if the bull market continued for another month, Google shares would lead the charge. This is in fact what happened, and we now have shot at a 50-to-1 payoff, or as much as $1000 per spread, if GOOG is trading at exactly 850 when the closing bell rings on Friday.

In practice, we’ll be doing extremely well to close out the spread for perhaps $500-$600, and that’s if we’re lucky enough to have GOOG shares ‘lock’ on $850 on Friday. The reasons for this are complex, but basically, the 85o calls we’d need to buy back, or ‘cover’, could be extremely volatile on expiration day if the stock is playing foot-sies with the 850 strike. Under such circumstances, moments before the final bell, market makers could conceivably pay up for ‘worthless’ March 850 calls because they wouldn’t want to face the uncertainty that comes with leaving at-the-money calls uncovered at expiration. Keep in mind that being ‘assigned’ on these calls is determined over the weekend by lottery, and so ten uncovered March 850 calls might turn into 1000 short shares of Google come Monday; or zero short shares; or any round-lot quantity in-between.

I’ve included a snapshot of the option grid at yesterday’s close that highlights our butterfly position. To close out a single spread, we would need to buy back two March 85os that we are short while selling a March 840 and an 860 call that we are long.  If each part of the three-sided transaction had been executed at a price midway between the bid and the offer when the snapshot was taken, the respective prices for the 840/850/860 would have tallied 1.50, thus:  +3.70/-1.30 x 2/+0.40,

Even though butterfly spreads are ostensibly for ‘sophisticated’ players, in practice they offer an easy way to gain bullish leverage without taking much risk. They are in fact a much better way to play bullish or bearish market hunches than simply buying ‘naked’ puts or calls, a strategy that is all but certain to lose over time.  _______ UPDATE (8:36 p.m. EST): Officially we closed out three of the four spreads for 0.75 apiece, yielding a $165 theoretical gain before taking commissions into account. (Fills at 1.25 were reported in the chat room, but my practice is to use the worst price reported.)  The remaining spread will be kept as a lottery ticket in case DaBoyz decide to promote hysteria on Friday, expiration day.