Tiered Play in RUT

[Steven Place]

RUT current vol is 13, and the RVX is 17. It’s a 4-point risk premium… not a ton, but still worth a sale.

We are going to do a “tiered” approach to this income trade. We won’t put on the full trade at once, but will add to it as the market moves. I’m expecting continued reversion (and maybe a pullback) headed into february.

Here is the trade:

Sell RUT Mar 1150/1100 Bull Put Spread for 16.80

Sell RUT Mar 1150/1200 Bear Call Spread for 21.22

Max Risk per fly: 1200

Initial target: 20% of risk or 240 per fly

Adjustment points: 1120 or 1180.

[Steven Place]

We haven’t hit our upside adjustment yet, but we are close enough and the directional exposure relative to the theta we are receiving is too out of whack.

To adjust, we will add another iron butterfly, this time centered around the 1190 strike

Sell Mar 1190/1140 bull put spread for 18.70
Sell mar 1190/1240 bear call spread for 16.20

This moves our upside breakeven up by about 30 points and gives us a lot more theta gains.

[Steven Place]

With the big selloff back to 1130, we are close to getting negative theta. We are up sligntly on the trade, but will add the third butterfly:

Sell Mar 1120/1170 Bear Call Spread for 25.30
Sell Mar 1120/1070 Bull Put Spread for 12.90

(N.B.: The reason the spreads are such a wide difference in price has to do with the skew)

Here’s what the trade will look like now:

We’re going for about a 25% return on risk, which is about 1k per set.

[Steven Place]

With the big selloff we are at the low end of the butterfly.

I’m going to add a put butterfly this time, as the short strikes are lower and there’s going to be more liquidity there.

Buy Mar 1130/1080/1030 Put Butterfly at 11 or better

[Steven Place]

After some shake and bake, RUT is now trading into all time highs. Because of our net short exposure, we must adjust.

To recap the total trade positioning, we put on:

1. A Mar 1100/1150/1200 Iron Butterfly
2. A Mar 1140/1290/1240 Iron Butterfly
3. A Mar 1120/1170/1220 Iron Butterfly
4. A Mar 1030/1080/1130 Iron Butterfly

If you look at them individually, you’ll see that #1 is about breakeven, #2 is a big winner, #3 is a small loser and #4 is a big loser.

The main thing we’ve got to worry about is if RUT rips to 1200 in short order. To protect against this, we will buy a 1×2.

Sell -2 Mar 1200 Calls
Buy +4 Mar 1210 Calls
Net cost: 300 per spread

This is just a super simple hedge against upside rippage.

We will reassess the trade in 10 days.

[Steven Place]

The big gap higher on the no-war Ukraine news has put us into negative theta territory… luckily we bought some gamma through the 1×2 and so we can adjust the trade a bit.

I want to do two things:

1. Close out the 1×2 for a profit
2. Roll one of the call spreads higher

The cost of the roll will be covered by the call spreads.

So first trade:

Buy to close +2 Mar 1200 Calls
Sell to close -4 Mar 1210 Calls
Net credit: 800 per spread

And the second trade:

Buy to close Mar 1150/1200 Call Spread for 38.50
Sell to open Mar 1200/1250 call spread for 17.00

[Steven Place]

Going to do one more thing that completely eliminates upside risk in the trade:

Buy 2 Mar 1210 Calls for 2.30 or better

We now have a guaranteed profit to the upside, and our downside breakeven is 1110.

Going to hold this through opex and just let all the contracts work out.

[Steven Place]

A final adjustment on this to maintain upside gains.

Buy to close Mar 1200/1250 call spread for 4.00

That gets delta flat and we’ll be sitting pretty heading into settlement tomorrow.

[Dale Ryker]

What was the final gain/loss % on this trade?

[Steven Place]

Russell Settlement was around 1205 so it ended up right around 800 per spread. That’s about a 12% return based off the maximum capital put into the trade.

[Author]

Posts