This weekend update includes answers to several questions I've received from you, as well as the Friday end-of-day recap of the current live position.
I'd first like to say that your feedback is important to me, and I encourage you to email me with any questions. This may be a strategy different than many are accustomed to, and it's important to understand any new trade thoroughly in order to attain positive results.
One question was:
What percent of your trades are successful? Do you publish that result? Do you experience losing years?
The chart below shows the history of live SPX Weekly Iron Butterfly trades so far for this year, indicating days of entry/exit, VIX, credit received and net gain. Premiums for the SPX Weekly Iron Butterfly are lower with these record-low VIX levels, but the trade continues to produce consistent gains.
As the weeks progress, this summary will be updated and posted. With regards to previous years' results; in 2012, I traded the SPX weekly Iron Butterfly for 47 weeks of the year. The average net gain per week for last year, was 1.6% for the 47 weeks trading the strategy. I began trading this strategy in December of 2011.
Another question from a reader was relative to adjustments on the SPX weekly Iron Butterfly. The question raised was:
"So you stay in each trade until you have either a $150 gain or $300 loss? But while waiting for that to happen, you may roll up or down if you experience a 10 point move in the underlying? How do you place the (adjustment) order? Do you try and split the difference between bid and ask as a limit order?"
I'll address each part of this question separately:
Yes, once the trade is entered, the plan is to stay in until the target gain of $150 or maximum loss of $300 is reached.
If the price of SPX moves 10 points up or down from the center strike, the threatened side is rolled 20 points. For example, let's use this week's position which is centered at 1560, with the long calls at 1590, long puts at 1530.
Adjustment to Upside: If the price of SPX moves up to 1570, the action adjustment would be to roll the call spread up 20 points. The adjustment would be:
BUY CONDOR (all calls):
BUY 1560 Call, SELL 1590 Call
SELL 1580 Call, BUY 1610 Call
This adjustment re-centers the position to the middle of the graph at 1570.
Adjustment to Downside: If the price of SPX moves down to 1550, the action adjustment would be to roll the put spreads down 20 points. The adjustment would be:
BUY CONDOR (all puts):
BUY 1560 Put, SELL 1530 Put
SELL 1540 Put, BUY 1510 Put
This adjustment re-centers the position to the middle of the graph at 1550.
The above gives the specifics on the standard 20 point roll in either direction. I would also like to share one other consideration when adjusting this trade to the upside. While I normally make this standard 20 point roll of the whole spread (keeping things simple), some traders may want to look at the value of the long calls, and narrow the spread accordingly. To use the example above, the standard 20 point call roll places the new long calls at 1610. The current value of the 1610 call is .10. It is perfectly fine, if the trader chooses to do so, to narrow the width of the call spread and place the new longs at, say 1600, when adjusting. The current value of the 1600 call is .15, which gives just a little more protection to the upside. The disadvantage of doing this when adjusting is that it costs more money.
There are always trade-offs when making an adjustment to any trade. If you think the market is moving quickly to the upside, you may want to consider narrowing the wing width on the call side. On the other hand, if the market is relatively quiet, it may not be necessary to pay the extra cost.
Below is an update on the live March4 Iron Butterfly:
Exit order was in at the open this morning to close the position for 13.45 debit. At 1:16 pm EST, with SPX at 1561.10, the order executed. Net gain $150 per contract, or 5% maximum allocated capital. This was our target for this position.
The next entry for the March5 cycle, which expires on March 29 will be next Thursday or Friday, March 21 or 22. Recommendations for trade entry & adjustments will be posted next Wednesday.
As always, stay keen on your risk management and trade carefully,