Home › Forums › Income Trades › Scaling Butterflies in RUT
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February 29, 2016 at 11:10 am #4753Steven PlaceKeymaster
I’ve been waiting for 1040 on the RUT to initiate this trade.
This is a SCALING trade, meaning as the RUT moves higher we will add more butterfly spreads, but at different strikes.
Add points are at 1065 and 1090.
Biggest risk here is a non-reverting rally, however I think as we head into 1,100 we will start to find sellers come into play.
Target profits is 20% return on risk.
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You must be logged in to view attached files.March 2, 2016 at 3:59 am #4761Jens KristiansonParticipantFilled at 9.00, need some reversion now 🙂
March 2, 2016 at 6:04 pm #4778Steven PlaceKeymaster1065 was the closing price today, so it’ll be time to add in the morning.
We’ll be looking at the 990/1040/1090 put butterfly. You could *technically* use an iron butterfly but we’re going to stay consitent with the positioning.
I’m concerned that this trade could end up getting away from me, simply from how the market is trading. If we need to add the third round of butterflies, it will really have to be a “whites of their eyes” kind of trade where we really need to make sure that the market is due for some reversion.
March 3, 2016 at 11:05 am #4789SureshParticipantDid you place the above discussed trade on 3/3/16?
March 3, 2016 at 12:00 pm #4790Jens KristiansonParticipantScaled into 990/1040/1090 @ 11.00
March 3, 2016 at 12:02 pm #4791SureshParticipantsame here. Thanks
March 3, 2016 at 12:21 pm #4793Steven PlaceKeymasterAdding to the trade:
Buy to Open RUT APR 990/1040/1090 put butterfly @11.00
If you’re REALLY scared about upside here, you can buy some IWM calls to cool off your directional exposure.
Got one more round to add, around the 1110 level.
March 3, 2016 at 12:56 pm #4794Steven PlaceKeymasterCurrent drawdown against total capital currently in the trade is -11%. Odds are this will get worse before it gets better, but when that reversion hits we’ll have a combo of delta gains and the time decay really getting sucked out of those short options.
March 15, 2016 at 3:51 pm #5012Steven PlaceKeymasterTrade 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:
March 15, 2016 at 5:47 pm #5014MarcoParticipantI have created a separate topic to ask why are we taken calls here instead of adding the other fly a few days ago. The topic can be found here
March 19, 2016 at 10:19 am #5064CodyParticipantGreat call on putting on the hedge Steve. Looking at some analytics this morning, I’m showing enough profit from the calls to cover the current loss on the original 950/1000/1050 fly just like you mentioned in the post above. So it seems like it would make a lot of sense to close/roll that up to something like 1030/1080/1130 next week. Unbalancing it could make sense too, like the 1030/1080/1120 which would flatten out some of the short delta, but it does decrease profit potential on a pullback. Curious to see where we end up on this one.
March 24, 2016 at 10:46 am #5130Steven PlaceKeymasterGoing to close this for a small loss here.
The total intent of the trade is to enter around 60 days to expiration and close with around 30 days.
Because more time has gone on, the cost of adjustments and rolling starts to increase significantly. It’s simpler to just bail and move on.
Here’s final risk in the trade:
Orders:
Sell to Close May 1050 Call @46.70
Sell to Close Apr 980/1030/1080 Put Butterfly @10.5
Sell to Close Apr 950/1000/1050 Put Butterfly @5.80
Now as a quick lesson… if I did want to try and hold it, all I would do here is buy the 1000/1050/1100 butterfly. What that does is basically takes the lower butterfly and converts it into a condor. I’d keep the hedge on.
This would basically increase delta by 3x but also bring theta from slightly negative to massively positive.
Then if the market ripped I’d close the call hedge and then buy the 1030/1080/1130 fly. This would convert the second butterfly into a condor.
Doing this would also increase total risk in trade by 2x, which is not something I’m comfortable doing.
March 24, 2016 at 11:33 am #5131Steven PlaceKeymasterThe second butterfly has different strikes and prices. My order was a fly with 10 points lower strikes
here’s the close:
Sell to Close RUT Apr 990/1040/1090 Put Butterfly @12.80 or higher.
March 29, 2016 at 2:46 pm #5198MarcoParticipant…it might make sense to start a new trade here
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