Jim Riggio put an SPX trade on about two months ago when the SPX was at 2000. Jim put a 90-day (DEC expiration) 1975/2000/2025 butterfly on. Nothing fancy or unbalanced. I put the same trade on the next day.
Jim and I took two different approaches to managing the trade
Jim was a “set and forget” while I started making the trade a broken wing butterfly as the market started moving down. My trade made a $1256 profit in just short of two months on about $7500 of margin used in the trade. That’s a return of +16.75% in two months.
But what does this have to do with that duck?
The way I managed the trade was to lift the downside and lower the upside. I was “floating” the expiration profit/loss up and down, as the market moved. Just as a duck floats on the water and goes up and down with the tide, I was floating my expiration profit/loss lines up and down.
Does it work when the market goes up?
Of course. I put the next floater trade on about a week ago with SPX around 1958. SPX is now at 2018 and I’ve “floated” my call side up above $0 profit at expiration. Let me show you.
SPX was at 1958
Notice how narrow this butterfly is. The probability of profit at expiration is only 12% if you don’t make any adjustments. Also notice how much time premium is in this trade. Because you are selling at-the-money options, you collect a huge amount of time premium to play with.
The First Adjustment
The next day, SPX starting roaring to the upside. I made my first adjustment by simply adding a bull call spread at 1950/1925. I’m generally trying to use the same strikes. It doesn’t matter if I use calls or puts. Vertical spreads at the same strikes are the same. One is a credit and the other is a debit, but the risk/reward is identical. I’m also trying to use strikes at major price levels as those strikes are more heavily traded.
Notice how the symmetric butterfly has changed to a broken wing butterfly
Fast forward a few days to Oct 30th.
SPX kept rising and I floated my call side up and the put side down a little more. This was because SPX is now well above the expiration break even and I needed to keep flattening the T+0 line. Here’s what the trade looked like at the end of the day on Oct 30th:
SPX is now at 2018 and I’ve floated the call side up and the put side down a bit more:
Notice the call side expiration profit is now above zero. The put short strike deltas are at -19.2 so the probabilities are shifting in the trade’s favor. The probability of profit in 33 days is about 80%.
This is a trade in development in my “test kitchen.” I need to spend some time back testing this. (I wish QuantyCarlo
was ready to go). I need to develop a set of rules for the trade, but at the moment, it’s a trader’s trade. The main goal is to keep the T+0 line pretty flat and the risk under control.
I like this trade for several reasons:
- You start with a lot of time premium to play with so you can make a good number of adjustments without ruining your profit potential
- The trade starts market neutral. You let the market tell you which way it wants to go and you react to that.
- If the market goes sideways, you start with good theta so you can make a profit relatively quickly.
- Risk is very low. The T+0 line is FLAT. My 10 lot butterfly was only $2000 in margin to start with. If we had a flash crash, that’s the most I could lose.
- Because I’m starting farther out in time, short term movements don’t need to be reacted on in the same way with a shorter time frame trade.
What do you think?