Trade is in a tricky place right now.
April options expiration is only 30 days away. And as time goes on, the cost of adding that third butterfly continues to increase.
On top of that, the position has a pretty aggressive amount of short delta (directional exposure) and if we see a catalyst (Fed Day) then we lose any kind of advantage in this trade, and will be stuck in this trade trying to manage it out of the hole.
What I am going to do here is go out to May options and buy some calls to hedge the upside. I’m looking to take off about 80% of the net delta.
Specifically, look to the 60 delta options. These are a little in the money so the time decay isn’t taken out of the trade, but they aren’t so far in the money that there is no liquidity.
Even more specifically:
Buy to Open RUT May 1050 Call @43.60
If you’re trading with smaller size, simply buy the IWM May 105 call.
Remember, IWM is 10% the size of RUT. So if you have only 1 RUT size on your net delta should be -23, which is -230 IWM.
If you have the equivalent short exposure of -230 IWM, then buying 3x 60 delta IWM calls will reduce your delta down to -50, which is much more manageable.
Now here’s what happens. If the market pulls back then you just let theta do its work.
If the market rips higher, you take profits on the Call hedge and use those profits to pay for the lower butterfly to roll higher.
If nothing happens then we can take the hedge off. But since we are going further out in time we don’t have to worry too much about time decay risk.
Here’s what the position will look like after:
