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Gear Head: A Tale of Two Trades… Comparing Pictures

April 1, 2010

There’s a powerful feature on the Analyze tab of the thinkorswim® from TD Ameritrade platform that lets you compare two or more option positions with each other, and visually compare their profit and loss profiles with risk curves. Here’s how.

  1. Go to Analyze > Add Simulated Trades.
  2. Type in the symbol of the stock or index for which you want to compare positions.
  3. When you see the option quotes open up, you can enter simulated trades in exactly the same way that you would create real trades—click on the bid for sells, the ask for buys, or right-click for spreads.
  4. For this example, to bring up your first trade, right-click on an option and select Sell > Vertical.
  5. For the second trade, right-click on another option > Buy > Butterfly. 

Both trades should be displayed at the bottom of the screen under “Positions and Simulated Trades.” If you click on the “Risk Profile” tab, you’ll see the hypothetical profit/loss of both the vertical and the butterfly positions as one line.

The dark green line represents the hypothetical profit/loss at the expiration date of the options in the position. As you can see, it mixes the hypothetical profit and loss of the position together, and there’s no way to compare the p/l of the vertical with the p/l of the butterfly. Unless you follow these next three steps!

analyze tab thinkorswim


Once you’ve selected your two trades, follow the three steps and compare the p/l for both immediately on through expiration. For illustrative purposes only.

1. In the middle above the graph, select “Single” in the “plot lines” dropdown menu to show you the hypothetical p/l of the positions on one, single date.

2. You control that date with the “Date” control in the right middle of the Analyze page. Set it to the expiration date of the options. An easy way to do that is to click on the little calendar icon next to the Date field and look for the highlighted third Friday of the month (which corresponds to the last trading day of most U.S. equity options). Now comes the fun part.

3. On the lower left side of the Analyze page, in the Positions and Simulated Trades section, you’ll see two small check boxes just to the left of the vertical and butterfly trades. Uncheck the outer box and check the inner box—which is what controls whether you see the hypothetical p/l of that position by itself. Uncheck the outer boxes for both the vertical and the butterfly, and check the inner boxes. That will show you the hypothetical p/l profiles of the vertical and the butterfly as two separate lines.

What’s useful about this feature goes beyond comparing the hypothetical p/l shapes of different spreads. It shows you how much risk each position has, and that a single short vertical, for example, may have a much higher max risk than a single butterfly. And further, if you adjust the quantities of the simulated trades, you can compare the max profit of the two spreads when their max risk is equal. What’s more, this functionality is available in paperMoney®, which means you can test out an advisor’s recommendations without risking real dollars. Remember, you can’t hide from P&L.

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