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Home › Forums › Income Trades › November Reverting Butterfly in RUT
As the RUT rallies into resistance, now is a good time to look at a bearish butterfly.
This is a specific income trade that looks for reversion, and uses a scaling strategy to get in.
Only 1/3 of a position is considered here:
Buy +1 Nov 1080 Put
Sell -2 Nov 1030 Put
Buy +1 Nov 980 Put
Debit: 10.00
If RUT continues to rally, we will add a 1000/1050/1100 put butterfly, and then a 3rd if the market continues higher.
This trade benefits from reversion but does not do well during a grind higher. If you’re trading breakout trades, much of the gains there will compensate for losses in this trade, however other adjustments need to be considered.
The simplest adjustment on any massive move higher is to close out the lowest butterfly and then roll it higher. This will increase theta gains to compensate from short gamma losses.
We can also consider using IWM calls as a hedge.
Holding timeframe for this trade is around 30 calendar days.
Here are the Nov breakeven levels to give you an idea of where the ideal trading range of RUT would be:
After the no-taper rally, the RUT is now 20 points above our initial purchase point. Now is a good area to pick up our 2nd butterfly:
Buy 1 Nov 1000 Put
Sell -2 Nov 1050 Put
Buy 1 Nov 1100 Put
Debit: 11.00