-11-
less than the price received for the short position so that the
trader’s account shows a debit.
“Butterfly spreads” occur when a trader holds three positions
in the same underlying asset in puts or calls in the same
expiration month at three different strike prices, with the highest
and lowest strike positions one-half the size of the middle
position.4
A General Description of Tandrill’s Trading Plan
On August 22, 1979, petitioner and Mr. Illingworth formed
Tandrill, a general partnership under the laws of Florida.
Tandrill is a combination of the names of its two partners: T.
ANDROS and R. ILLINGWORTH. Petitioner contributed the major portion
of the funding for the partnership while Mr. Illingworth agreed to
conduct Tandrill’s trading activity. As stated in the partnership
agreement, the purpose of Tandrill was to trade in:
commodities of every nature, foreign
currencies, U.S. Treasury Bills, U.S. Treasury
Bonds, GNMA Certificates[5] and other
4 A “butterfly” spread is a balanced straddle position.
An example of a butterfly spread in gold would involve the
purchase of one contract of February gold, the short sale of two
contracts for April delivery, and the purchase of one contract of
June gold. If the price of gold goes up, the investor will profit
on his two long contracts in February and June and lose a
substantially like amount on his two short April contracts. The
“butterfly” spread gets its name because it has a heavy body in
the center (in this case the two April short contracts) and
lighter wings on the side (in this case the one long contract
each in February and June).
5 GNMA’s, sometimes referred to as “Ginnie Maes”, are
long-term coupon-bearing securities issued through the Government
(continued...)
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