I'm going to take a tiered income trade in SPX.
1. Vol is going to continue to fall out, especially after the yellen stuff tomorrow.
2. OTM puts are already being sold, which takes iron condors out of the equation.
3. The Iron fly puts us a little net short, given the rally we have is fine with me.
Again, this is a tiered structure, so start with 1/3 of a position with the intent to add.
Here's the trade:
Sell SPX Mar 1800/1750 Put Spread for 16.00
Sell SPX Mar 1800/1850 Call Spread for 20
We will add another tier on a move to either 1825 or 1770.
Target profit is 20% of max risk.
Update: February 13th, 2014
1825 got hit, so I'm going to add to it. Normally I'd look at an at-the-money fly, but I need to reduce upside risk. So I will pick up an 1850 butterfly.
BUY SPX Mar 1820/1850/1870 Call Fly for 9.00 or less.
If we run to 1850 we will add on one more set of flys.
Update - February 21st, 2014
We're going to add a broken wing butterfly to get us a little more upside exposure.
Buy 1850/1870/1900 Call butterfly at 2.50
This will widen out our area of profitability and give us some more upside cushion.
Update: February 26th, 2014
This market feels ready to rip higher, and I am super nervous about the upside risk in these income trades.
To reduce my deltas (while keeping the long theta intact) I am going to buy some bull call spreads as a hedge:
Buy Apr 1880/1900 Bull Call Spread @ 7.00
This reduces the total delta risk by 50%.
If we lose 1823 I will close out the hedge for a loss and let the rest of the trade stay on.
Update: March 7th, 2014
By picking up that call spread we were able to mitigate some of the upside risk in the position, which was the right call after the easing of Ukraine tensions.
What we are going to do now:
1. Sell to close the call spraed hedge
2. Buy to open another set of butterflies.
3. Roll one of our put spreads higher.
What happens here is that 1 and 3 help to pay for 2. This will reduce the capital required in the trade, keep our delta low, increase our max reward (at these prices) and decrease our odds.
Here's the trades:
1. Sell to close Apr 1880/1900 call spreads at 10.00
2. Buy to open Mar 1870/1890/1910 Call butterfly for 5.15
3a. Buy to close Mar 1800/1750 Put spread at 1.50
3b. Sell to open Mar 1830/1780 Put Spread at 3.80
Here's the new position risk:
Update: March 12th, 2014
The pullback and theta has put our trade nearly to breakeven, so we've just got to hold on and protect our risk.
Going to add one more adjustment here to reduce upside risk.
Buy 2 Mar 1880/1900/1920 put butterflys at 4.00 or lower.
This will cut our current deltas in half, move our breakeven up 5 points, and not really affect our theta gains much.
We will reassess the trade on friday.
Update: March 14th, 2014
Adding one more fly to this bastard of an income trade:
Buy 2 Mar 1800/1820/1840 Put Butterflies for 2.00 or lower.
That moves the breakeven down 20 points to reduce risk heading into the weekend.
I'm going to hold these to expiration and just let them all expire-- remember SPX is cash settled so we don't have to worry about getting assigned stock.
Update: March 21st, 2014
SPX settlement: 1893.
That puts us here:
Margin and P/L
Margin Explanation, For 3 Spreads Per Tier.
Iron Butterfly Trade
Buy to Open SPX Mar 1750/1800/1850 Iron Butterfly
This is a combination of the 1750/1800 put spread @16.00 and the 1800/1850 call spread @20.00
Spread width: 5000
Put spread credit: 1600
Call Spread Credit: 2000
Initial Margin: 4,200 (3 spreads total)
Call Butterfly Add
Buy to Open SPX Mar 1820/1850/1870 Call Fly @9.00
Margin: 6900... Upside max risk is cut by 3k
Broken Wing Butterfly Add
Buy to Open SPX Mar 1850/1870/1900 @2.50
This closes out the existing 1850/1870 call spread and opens up the 1870/1900 bear call spread
Buy to Open Apr 1800/1900 Bull Call Spread @7.00
Sell to Close Apr 1800/1900 call spread @10.00
Buy to Open Mar 1870/1890/1910 @5.15
Put Spread Roll
Buy to Close Mar 1800/1750 Put Spread @1.50
Sell to Open Mar 1830/1780 PUt Spread @3.80
Put Fly Add
Buy 2 Mar 1880/1900/1920 Put Fly @4.00
Put Fly Add
Buy 2 Mar 1800/1820/1840 Fly @2.00
Max Margin: 9750