1280 has been hit on the RUT, this is coming a day after the Fed saying they’re not going to surprise the market with a Jun rate hike.
This is where the trade gets a little tricky.
As we have 30 days left to expiration, the cost of rolling becomes a little harder to do. On top of that, if we were to add another butterfly, there isn’t much liquidity in the deep in the money puts that we would need to put on.
Here’s what the trade looks like right now:
Beieve it or not, this trade still has positive theta… that’s because the short options are still decaying faster than the long options. The main risk is in the delta.
Yet, the theta will soon shift from positive to negative so we want to get away from that problem.
Here’s what we are going to do:
1. Close out the lowest butterfly.
2. Close out half of the higher butterfly.
3. Add an iron butterfly.
4. Close out the call buy hedge.
This may seem complex, but here’s why we are doing it this way:
If we were to “Roll” the low butterfly higher, it would effectively convert the trade into a big put condor. And due to executions and liquidity, I’d rather do an iron condor.
Here are the trades:
1. Sell to Close RUT Jul 1150/1200/1250 Put Butterfly at 4.10 or higher.
2. Sell to Close RUT 1280/1230 Put Vertical at 11.80 or higher
3. Sell to Open RUT 1280/1330 Call Vertical at 19.00 or higher
4. Sell to Close IWM Aug 123 Call at 6.05 or higher
If you want, you can combine orders 2 and 3 via an iron condor order, but it will be more difficult to get filled.
Here’s what the trade looks like after:
This only slightly increases the short delta, but increases the theta in the trade by several orders of magnitude.
If 1300 is hit, we will roll the lower side of the put up to 1280.
All in all, we want to be out of this trade no later than 2 weeks. The current timeframe we are working with is pushing it but it is still manageable.