Income Trade in RUT

[Steven Place]

Same structure that we put on last month. Buy some put butterflies and get an upside hedge.

Here’s the quotes at the time of this post to show you what a good fill is:

So 8.50 is a very fillable order price.

Now for each of these flys, that puts you at -5.86 delta.

So we’re going to go out one month further and buy IWM calls:

Buy to Open IWM Aug 123 @4.03 or lower

Remember- IWM is 1/10th the size of IWM so by purchasing a near 50 delta call, that’s the equivalent to 5 deltas so it puts us nearly delta neutral.

Current gameplan is:

1. If RUT hits 1260, close the call buy and add another round of butterflies– the 1180/1230/1280 put fly specifically.

2. If RUT closes sub 1200, then close the call buy hedge for a loss. If RUT rebounds back up to 1230, we will rebuy the hedge.

3. If RUT closes sub 1170, we will add another round of butterflies, strikes TBD.

[Steven Place]

RUT hit 1260, but because I still need the upside hedging, I’m not going to close the call buy. Instead I’ll just add the put fly.

Buy to open RUT Jul 1180/1230/1280 put butterfly @10.10 or lower

Risk after the add:

[Steven Place]

Here are some notes I put out in the chat about this trade:

current trade looks like this
so you’re probably concerned because you see that white line
and then look at that yellow line
and say “if RUT stays at this price i could lose a lot of money”
so in response to that
1. the trade has 2 months left and the RUT won’t stay at 1260
2. the trade technically is still theta positive

now comes the tricky part
the plan is to add another round of put flys
by doing that, it really cranks up the short delta
if i changed my mind and did something like an ATM iron fly
50 points wide
sure it widens out the odds and makes it look better going into opex
but the gamma sensitivity ratchets up

my main concern with this trade is if the RUT just rips to 1300
which would suck hard
the third tier doesn’t come into play until 1280
but because of all that i’ve gotta keep the long calls on

[Mark Sedlak]

Steven,

When you have some time can you walk us through the adjustment strategy for this income position. Are we waiting for a push to 1280 to add a third butterfly?

Thank you,
Mark

[Steven Place]

Mark,

Yes. Basically it’s a “sit on hands” kind of trade until we see some kind of decent movement higher.

If the market overall does manage to selloff then we’ll just take the profits on the whole trade.

[Steven Place]

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.

[Steven Place]

The market has pulled back a touch, but I want to cut deltas in half again so I don’t get caught off guard on a move to 1300 on some form of Greek deal.

Per spread, the total delta is right around -36, so I want to buy around 18 deltas in the RUT.

That means we’re looking at 180 deltas on the IWM.

So we can buy 3×60 delta calls in the IWM.

Here’s the trade:

Buy to open IWM Aug 126 Calls @3.96

3x per spread you have on.

That takes the RUT deltas down to around -16 and keeps the theta at 37.63 per spread.

Game plan from here…

IF RUT hits 1300, we will roll the put side of the condor higher.

IF RUT hits 1260, we will close the hedge for a loss.

• This reply was modified 11 years, 1 month ago by Steven Place. Reason: added graph

[Steven Place]

Going to bail on this trade.

Reasons:

1. There’s only 11 days left to options expiration. I don’t want to be stuck on the gamma knife edge.
2. The position has accumulated too many long deltas… basically the upside hedges didn’t work this time around.
3. There’s event based risk in the short term that makes this not the best risk/reward.

Here’s how to close out the trade:

1. Sell to close IWM Aug 126 Calls @1.78

2. Buy to close RUT Jul 1280/1330 Call Spread @1.90

3. Buy to close RUT Jul 1230/1180 Put Spread @9.50

After all that work, the trade’s finishing at breakeven, when you include the gains from the original hedges.

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