Butterfly Spread

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This was our second RUT Butterfly we put on this month. This trade was placed with RUT trading around 658. Immediately upon placing the trade, the index, along with the rest of the market, started a big down move, eventually traveling more than 10% before bouncing back up some today. Despite the move, thanks to the magic of adjustments, we closed the trade out at a respectable profit yesterday.

See various risk graphs below….

Our position right before starting to close it out

Unwinding position. A guaranteed profit is locked in here, with more future profit possible if RUT makes a significant move either way

Trade initially placed with RUT trading around 658. Trade taken off with RUT trading at 590

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, credit spreads, Iron Condor, iron condors, Vertical Spread, vertical spreads

ABOVE: Position as we start to unwind it. Profit target hit.

ABOVE: Left on one of our extra long calls as lottery ticket.
Our profit goal is locked in.

Closed out our July Butterfly / Iron Condor for just under 9% profit.

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors

Our July Iron Condor / butterfly spread is off and running. So far so good as we have a profit already and have our ‘ whipsaw curbs’ in place while retaining a good theta. Stay tuned…

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, iron butterfly, Iron Condor, iron condors

Closed out our last June Iron Condor Butterfly Spread today for right under a 5% gain. Todays big down move in reaction to employment numbers put the position right at the sweet spot at the open. Rising vols initially hurt the position a bit, however as the morning progressed, what appeared to be some friday theta release helped push the position up over 5% where we decided to just close it out rather than wait and see what monday morning might bring. Several risk graphs below at various stages of unwinding position…

Above: Initial Position at Open

Above: Starting to unwind position. We held this position for about an
hour while trying to get a ‘better than quoted’ fill. Once again, fills were
difficult today. Trades that are usually very easily filled at the mid simply
won’t go and it takes quite a bit of time to finally get a decent fill.

Above: Majority of position removed.

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors

June RUT Butterfly Spread

This is our 3rd Butterfly Spread we’ve traded this month. Even with this very volatile month because of our new ‘flex’ adjustments we’ve been able to bring in a profit on each one. This trade is just now starting to show a profit and we expect (knock on wood) to close this out profitably early next week.

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor, iron condors

During the ‘flash crash’ where the dow sunk 1000 points we had an iron butterlfy position on that performed remarkably well thanks to a simple, cheap, way out of the money put adjustment we had made earlier in the day.

Taken at 11:40 AM

A couple hours before the big drop, we put on a simple put adjustment due to our position hitting some greek criteria. When the crash happened, that cheap little way out of the money put quickly blew our position (which was showing a loss of around -2.5% at the beginning of the day) into a profitable position of over +20% as the market fell out of bed.

Above and below see some risk graph screenshots that were taken of this position as the market was going down…

Taken at 12:09 PM

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condors

April 2010 Expiration

This months Butterfly Spread Trade was another pretty much ‘perfect’ trade. Very little management was required - lazy trading at it’s finest. Opened this trade on 3-21-10 - closed it on 3-29-10 - for an open trade duration of just 9 days.

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor, iron condor spread, iron condors, Vertical Spread

When you look at a risk graph of the butterfly spread, you can see that the butterfly payoff is tremendous - especially when compared to other option income spread strategies such as the iron condor, the credit spread, the diagonal, double diagonal, the calendar, double calendar, etc.

Depending on where the wings are placed on these trades (how close or far they are purchased in relation to the strikes sold) it is possible to create a butterfly trade where the possible reward is many times the risk taken on.

However, in the instances where the reward is so many times greater than the risk, the wings are purchased very close to the sold strikes, creating a very tall yet extremely  narrow ‘profit tent’ which the underlying needs to stay within in order to realize that huge payoff - which the odds will be very low.

Even so, if the underlying stays within the general vicinity of this tall, narrow profit tent - and the trader doesn’t plan to stay with the trade all the way until expriation day - a good profit can still be taken from these lower probability butterflies as the 0 day profit line rises up quite quickly and a decent return can be grabbed within a short amount of time.

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photo credit: timomcd

Technorati Tags: Butterfly Option, butterfly payoff, Butterfly Spread, butterfly trade, Credit Spread, Iron Condor, iron condors, Vertical Spread

Technorati Tags: Butterfly Option, Butterfly Spread, Credit Spread, Iron Condor

Butterfly Option Spreads are one of the most ‘robust’ option trades of the ‘main’ option spread income strategies. In other words, the butterfly spread can withstand more ‘abuse’ from a volatile market than say the iron condor, diagonal, or calendar, - and still come out smelling like a rose.

One reason for this has to do with the amount of premium brought in at the start of the trade. Because in most cases the short strikes of the buttterfly strategy are sold ATM (at the money) an extremely large amount of ‘premium’ is brought into the account - which can help to fund future trading tweaks and  adjust ments if / when neccesary.

Also - if you look at the risk graph - or payout diagram - of the butterfly spread, you can see that the 0 day line (the line representation on the graph which represents what the current value of the position is) is really forgiving in either direction. The slope of this line on the graph is much flatter over much longer of an area than say the iron condor.

In a wild market, I’ve found the butterfly spread much more tolerable and also easier to adjust - again, partially due to the fact that I have so much premium to work with in ‘purchaing’ additional insurance - where, say with the higher probability iron condors, there really is only so much premium to work with while adjusting - and a trader needs to much more careful and precise while managing.

photo credit: Ajith

Technorati Tags: Butterfly Option, butterfly option spreads, Butterfly Spread, Credit Spread, Iron Condor, iron condors, vertical spreads