The markets have been much too difficult to wrangle lately. We need to have a little fun this summer. Fun with a purpose, that is.

As you adjust positions, you may find that your expiration graph takes on a different shape. I remember being amazed the first time I saw someone take a look at someone else's much-adjusted position and identify the various strikes in the main position as well as "a little something" that person had added as an adjustment. How did he do that so quickly? I wondered at the time.

That ability wasn't just a fun parlor trick. A trade that looks like an iron condor after adjustment, even if it started out as a butterfly, is going to act a lot like an iron condor. The seasoned traders among you may find today's article beneath them, but the less experienced traders unused to various strategies may find it helpful to learn the basics of looking at a graph and determining the underlying strategy.

Mystery Graph 1:

First impressions: tent shape with peak at about 990, and expiration breakevens at 958.56 and 1021.16. The expiration breakeven chart features all straight lines with sharp angles, important in determining the underlying strategy, as we'll see. "Something happens," as that long-ago savant said, at about 940 and 1040. Losses flatten out near those zones and don't get any deeper below about 940 and above about 1040.

The tent shape identifies this as either a butterfly or a calendar. The fact that all lines on the expiration graph (not the curved "today" line) are straight lines pegs this as a butterfly and not a calendar. A calendar is a spread that incorporates options from two different expiration periods, and expiration graph lines will curve as a result.

The peak near 990 tells us immediately that the center of the butterfly is there, so the strikes that form the body of the butterfly were sold at 990. Do the expiration breakevens tell us where the long strikes that form the butterfly lie? No, a butterfly's expiration breakevens are always inside the long strikes rather than at them.

The flattened or horizontal lines near 940 and 1040 tell us that losses quit steepening at that point. That must be where our long strikes are set, then, because once price gets below 940 or above 1040, the protection of those long strikes kicks in and losses don't steepen.

If Armageddon happens, what's the maximum loss that you can sustain? I'm not talking about the planned maximum loss you want to take, the point at which you would exit the trade. I'm talking about the loss that might happen if you play deer-in-the-headlights and let the trade go to expiration with price well outside the tent. Although the most you can tell from glancing at this chart is that it's somewhere around $2300-2400, it's actually $2328.00, plus commissions.

Can we tell whether this is a put butterfly, a call butterfly, or an iron butterfly? Perhaps if one were current on the skew, one might be able to draw conclusions based on the Greeks or the degree the "today" line slanted to the right, but that's beyond my skills. Other than concerns about buying and selling deep-in-the-money puts or calls, these three butterfly types all act and look the same, for the most part.

Hints given with the discussion of the first mystery chart should help identify the second one.

Mystery Graph 2:

This strategy also features a tent shape with a peak at about 990. Expiration breakevens are 962.20 and 1020.22, not very different from the prior expiration breakevens. We know from the prior chart that something must have been sold at that peak, but where is(are) the long(s)?

Instead of a tent shape that slants down in straight lines, then angles into horizontal lines at the longs, we see lines that curve down from the peak of the tent and then roll out to show a maximum loss just above $1,000. From the prior discussion, we know that expiration chart lines that curve mean there must be options from more than one expiration cycle comprising this strategy.

This is a calendar formed by selling a JUL 990 and buying an AUG 990.

Mystery Graph 3:

No curving lines show up on the expiration graph, so all options must be within the same expiration period. We see right away that the amount of the potential loss is far greater than the amount of the potential profit, but that profit is available over a much wider span than is true with the butterfly. That's a clue.

We see that "something happens" a little before 910 and again a little before 1050, as the horizontal profit lines angles down beginning there, until it hits a little beyond 900 on the downside and a little beyond 1060 on the upside. From that point, it flattens horizontally again and losses don't steepen.

This is an iron condor. From our examination, we know that shorts are sold at 910 and 1050, and longs are bought at 900 and 1060. We also know from comparing maximum possible gain and maximum possible loss that traders absolutely cannot play deer-in-the-headlights with these iron condor trades. The possible profit on this one-contract iron condor is about $127 minus commissions. The maximum loss, however, is $873.00 plus commissions. Traders employing this strategy do not make enough month by month to allow them to ever let a trade like this go because they "know" that price is going to turn around.

Mystery Graph 4:

What's this? It looks a little like a butterfly with the peak of the tent lopped off or maybe a little like an iron condor with the sold strikes squashed close together. It has all straight lines making up the expiration graph, so we know that all the options are in the same expiration cycle. The lopped off peak has edges at about 990 and 1000. "Something happens" at about 940 and 1050, too.

From our prior examinations, we know that shorts were sold at 990 and 1000. We know that there must be longs at 940 and 1050 because the loss stops increasing and flattens at each of those levels.

This is a split-strike iron butterfly. In an iron butterfly, the sold calls and sold puts are often at the same strike. In this case, the RUT was at about 995 when the chart was snapped, and so I put the sold puts at 990 and the sold calls at 1000, splitting them between the two strikes. We can see that the maximum loss is about the same as in the first butterfly shown, but the expiration breakevens are pushed out a bit on the upside because of that 1000/1050 spread that comprises the upper part of the butterfly.

This short of shape often occurs, too, when all-put or all-call butterfly traders decide to adjust a butterfly by rolling up the upper credit spread. For example, if the RUT were hitting the upside expiration breakeven in a +1 940/-2 990/+1 1040 butterfly, I could do a condor roll as follows to move out the upper strikes: +1 990/-1 1000/-1 1040/+1 1050. That would create the same shape seen in the fourth chart. That sort of shape sometimes appears, too, when I buy call debit spreads to hedge against an upside move in my all-put butterflies.

These are just basic ideas about what you can tell by quickly glancing at a chart. They may become important as you adjust your trade, altering its shape. Knowing the different shapes can tell you how your trade might act if you've adjusted it and reshaped it. It's happened that traders have glanced at their charts and realized that they didn't include all the adjustments in their simulations or noted that "something happens" at one point, realizing that they had a hedge that they had forgotten and may want to alter.