Hedged Put Fly in RUT

[Steven Place]

Going to start a position in July income trades.

The proportionality of these trades matters, so we’re going to use this as our risk unit:

Buy 2 RUT Jul 1120/1080/1040 Put butterflies at 5.50 or lower

Buy 1 IWM Jul 105 Call at 7.26

Note the different instruments. We are doing this because IWM is 1/10th the size of the RUT and is easily interchangeable to hedge deltas off.

If we see a pop to 112 we will close out the call buy and add another round of butterflies

If RUT sells off to 1050 then we will add some downside butterflies.

Very, very slowcooker kind of trade.

 

 

[Steven Place]

With the massive rip higher in the RUT, our butterflies have taken a hit but the calls picked up have hedged perfectly. Overall the trade is up about 4% right now.

Next thing we will do is close out the call buys and add another round of iron butterflies to the trade.

Sell to close IWM Jul 105 Calls @8.80

Sell to open Jul 1140/1180 call spread for 16.70 or higher
Sell to open Jul 1140/1100 put spread for 15.00 or higher.

This puts us into one of those goofy batwing trades.

A move to 1160 and we will add a third round of butterflies.

[Steven Place]

The trade is looking fine, but the fact that the RUT is not able to fill this gap leads me to believe a squeeze to 1160 is very possible.

Simply put, the fact that I really don’t want this market to run higher means it probably will… so I’m going to protect this trade against upside risk.

Because of this, we’re going to put on some upside hedging just in case we get that squeeze that I don’t want to happen.

Here’s the trade:

Sell -1 Aug 1180 call
Buy +2 Aug 1200 call
net debit: 3.00

This ties up a bit more margin due to the strike difference, and we don’t want to hold this trade for very long.

Basically, if the market squeezes to 1160 we will take this trade off for a profit and add our final butterfly. If we start to fill the gap, that’s fine too and we can just sit on our hands again.

[Steven Place]

1160 got hit today, and our upside protection has done it’s job.

Here’s what to do next:

Buy to close RUT Aug 1180 call
Sell to close 2x RUT Aug 1200 call

Effectively we’re closing out the Aug call backspread for 6.50

Next step will be to add our third butterfly:

Buy Jul 1140/1180/1220 call butterfly for 11.30

This pretty much keeps our short deltas the same but it doubles our theta gains.

Here’s the risk profile:

Don’t get me wrong, this is a “goofy” looking trade. And you’re probably concerned about that “dip” once we get under 1123.

First off, I think it’s going to be very, very difficult for the market to get back under 1123 given the breakout we just had.

Second, even if we do see that pullback, it’s actually going to be profitable simply because of the short delta exposure.

Third, if we do see that pullback, we’ll simply adjust again to get our theta back in line.

That’s not going to be the risk in the trade. The risk continues to be the upside risk. Given that we’re gapping into the upper bollinger band, it’s probably a safe bet right now to be net short deltas. If we come into 1180 in short order we’ll add some more upside protection.

[Steven Place]

RUT has seen a classic “pullback” pattern, where after the strong move in early june, it has worked off overbought conditions. After retesting 1180 yesterday, we’re seeing a tiny dip. If it retests 1180 a third time, it will most likely breakout and run to 1195.

Given the short deltas in the trade, we need to buy some upside protection (again). The call backspread we had on previously as a hedge worked out well, and will continue to if we see a pop.

Sell -1 Aug 1180 Call
Buy +2 1200 Call

Debit: 7.70

This trade effectively cuts our risk to the upside by half, with not a lot of loss in our theta gains. If we run to 1200 in short order, we will take the profits from the call backspread and roll the lowest fly higher.

[Steven Place]

This pullback is just what we needed on this trade… there was way too much risk with the RUT at 1210, so I’m going to exit this trade with a loss and simply move on.

It’s a little tricky on how to exit this trade, so let’s split it up.

There are 4 parts to all the open orders:

1. A jul 1120/1180/1040 put butterfly
2. A jul 1100/1140/1180 iron butterfly
3. A jul 1140/1180/1220 call butterfly
4. An aug 1180/1200 call back spread as a hedge

Here’s what to do:

1. For the jul 1120/1080/1040 put butterfly, just let it expire. There’s 0.33 left of value so if you want to just float an order out for 0.30 that’s fine.

2. For the July 1100/1140/1180 iron fly, buy to close the whole thing at 35.20. You may need to split up the trade.

3. For the July 1140/1180/1220 call butterfly, sell to close the whole thing at 16.75

4. For the Aug 1180/1200 back spread, sell to close at breakeven.

All things considered including slippage, commissions, and the realized profits, this trade finished with a loss of around 4% relative to max risk. This is a “good” loss, but would not have happend had we not had a big pullback.

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