April 22, 2015 at 2:20 pm #2066Steven PlaceKeymaster
This is going to be another scaling butterfly in the RUT, but we will add some upside hedges to reduce the initial directional risk… that is where it will get a bit tricky because the hedge is a function of position sizing.
So here’s the initial trade:
Buy to open RUT Jun 1190/1240/1290 put butterfly at 10.00 or lower.
This is where it gets tricky…
We want to cut our initial delta risk in half.
So the butterfly has a delta of -7.68 in the RUT, which is equivalent to -76.8 in the IWM.
To cut our delta in half, simply buy the 40 delta call in the IWM.
THIS IS IMPORTANT — to remove theta risk, go one month further out to July. So you buy the Jun butterfly, and the Jul calls.
If you are putting on 10 butterflies, then just buy the 40 delta call in the RUT.
At the time of this writing, the Jul 40 delta call is the 128 strike. That’s 1280 on the RUT.
The reason we can do this is that the IWM and RUT track the same thing, just with different magnitudes.
So here’s what the risk looks like:
The plan here is:
1. If RUT breaks above 1285 we will close the calls for a profit and ADD more put butterflies.
2. If RUT breaks under 1240 we will close the calls for a loss and let the butterflies stay on, and then if the market moves big in either direction we will adjust as needed.May 1, 2015 at 9:13 am #2067Steven PlaceKeymaster
Market has pulled back and a ton of theta has come in… I think some things also changed with the vol skew that has helped the trade as well.
The trade is up 25% return on risk after just under a week so it’s time to bail. If RUT moves big again we can consider putting something similar on.
Because the options have gone in the money it’s going to be a huge pain to exit. Here are the quotes I pulled and the suggested fills:
So a fill at 14.50 is pretty feasible here, especially heading into the close.
Once you get a fill to close out your butterflies, close out the long call for a loss. I’m seeing a fill of 4.30 on the RUT Jun 1290 call
The gains from the butterfly should well cover any losses from the long calls–remember to view these trades as in aggregate. This was a great winner in a very short amount of time.
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