I wrote about the RUT monthly trade a few weeks ago; it is now time for the May Iron Butterfly trade entry.

RUT closed today at 923.33, quite a rebound from yesterday's drop of over 35 points.

RUT 6 month chart

Trade Entry Date: Wednesday, April 17

Entry Guidelines:

- Wait at least 45 minutes - 1 hour after market open before entering. Exact entry time is trader's choice. I sometimes wait until late in the afternoon to enter, depending on intra-day price movement.

- Look at economic news for the day. If there is potentially market moving news being announced, do not enter the trade in advance of the news release. Volatility often increases leading up to a news release, which can help you get a better credit by entering soon after the news.

- If the price of RUT moves +/- a one-day, one standard deviation, do not enter the trade until the movement is less than a one-day, one standard deviation. As of today, this is approximately 10 points according to the calculation on my broker's trading platform.

- Enter even strikes only. Even strikes tend to have higher open interest than the odd strikes. Additionally, sometimes the odd strikes are not available when you have to adjust.

- Review the article posted on April 2, 2013 Titled "Are You Looking for a Monthly Trade? with the basic trade guidelines.


The series of graphs below illustrate the standard management guidelines for the RUT monthly Iron Butterfly. The prices shown are not meant to be recommended trade entry strikes, as the screen shots were captured several days ago when RUT was at 942 at the close last Friday.


This is the original position at entry:

RUT Iron Butterfly centered at 940

In the next graph below (Graph #2), RUT moves up 10 points to 950. The adjustment is to roll the call side up 20 points. This position is now a 20-point wide Iron Condor.

RUT Iron Butterfly after a 10 point move

The next graph below illustrates RUT moving up another 10 points in the same direction, after you have made the first adjustment (illustrated in Graph #2). With RUT at 960, the opposite side (put spreads) are rolled up 20 points. The new position is now an ATM Iron Butterfly centered at 960. Rolling up the put spreads results in a credit.

RUT ATM Iron Butterfly centered at 960

What if RUT reverses and moves back down? The next graph below illustrates the position if RUT reverses, and moves back down to the original center strike after you have made the first adjustment (illustrated in Graph #2). If this occurs (classic "whipsaw"), it can be easily managed by reversing the first adjustment that was made to the upside (which was rolling the call spreads up). This is done by rolling down the call spreads 20 points. The position is now back to the original Iron Butterfly centered at 940. Rolling down the call spreads results in a credit.

RUT Iron Butterfly Back to Original Center

My intent with the above visuals is to illustrate how simple this trade is to manage; you simply follow the market movements so the position is always an ATM Iron Butterfly or a 20 point wide Iron Condor. Adjusting every 10 points helps stay on top of market movement.


Now; onto the May position. Trade entry details are outlined below with 2 price ranges for entry as of the close today:



1) If the price of RUT is between 905 - 914.99 enter the following trade with the Iron Butterfly centered at 910:


Order Entry: SELL (1) IRON CONDOR.

SELL 1 contract May 910 CALL

BUY 1 contract May 960 CALL

SELL 1 contract May 910 PUT

BUY 1 contract May 860 PUT

CREDIT: At the close today, credit is $32.10. This most likely will not be the credit at the time of entry. Generally, credits for this position will vary depending on time of entry, volatility, price of the underlying, etc. Over the last several months, credits have ranged from $27.00 - $33.00.



Position Adjustment Trigger Points (if RUT moves +/- 10 points from center strike). Note: Try to wait 45 minutes - 1 hour after market opens before making any adjustments. Watch key levels of support or resistance before adjusting. If RUT is at, or hovering around, support and resistance levels, it may be prudent to wait a bit longer to adjust. Many times the first hour's price movement is not reliable. My personal preference is to wait until the end of the day whenever possible before adjusting.


- Upside adjustment if RUT reaches 920.

Roll Call spreads 20 points:

Order entry for adjustment: BUY (1) CONDOR using all CALLS.

BUY 1 contract May 910 CALL

SELL 1 contract May 960 CALL

SELL 1 contract May 930 CALL

BUY 1 contract May 980 CALL


- Downside adjustment if RUT reaches 900.

Roll Put spreads 20 points:

Order entry for adjustment: BUY (1) CONDOR using all PUTS.

BUY 1 contract May 910 PUT

SELL 1 contract May 860 PUT

SELL 1 contract May 890 PUT

BUY 1 contract May 840 PUT

2) If the price of RUT is between 915 - 924.99 enter the following trade with the Iron Butterfly centered at 920:


Order Entry: SELL (1) IRON CONDOR.

SELL 1 contract May 920 CALL

BUY 1 contract May 970 CALL

SELL 1 contract May 920 PUT

BUY 1 contract May 870 PUT

CREDIT: At the close today, credit is $29.82. This most likely will not be the credit at the time of entry. Generally, credits for this position will vary depending on time of entry, volatility, price of the underlying, etc. Over the last several months, credits have ranged from $27.00 - $33.00



Position Adjustment Trigger Points (if RUT moves +/- 10 points from center strike). Note: Try to wait 45 minutes - 1 hour after market opens before making any adjustments. Watch key levels of support or resistance before adjusting. If RUT is at, or hovering around, support and resistance levels, it may be prudent to wait a bit longer to adjust. Many times the first hour's price movement is not reliable. My personal preference is to wait until the end of the day whenever possible before adjusting.


- Upside adjustment if RUT reaches 930.

Roll Call spreads 20 points:

Order entry for adjustment: BUY (1) CONDOR using all CALLS.

BUY 1 contract May 920 CALL

SELL 1 contract May 970 CALL

SELL 1 contract May 940 CALL

BUY 1 contract May 990 CALL


- Downside adjustment if RUT reaches 910.

Roll Put spreads 20 points:

Order entry for adjustment: BUY (1) CONDOR using all PUTS.

BUY 1 contract May 920 PUT

SELL 1 contract May 870 PUT

SELL 1 contract May 900 PUT

BUY 1 contract May 850 PUT



Please note: My goal in the above guidelines is to give enough detailed instructions for trade entry within the 2 prices ranges I felt would be likely for RUT. However, if RUT is outside of these two price ranges, the following are alternate trade recommendations for entry.

UPSIDE MOVE: If the price of RUT is between 925 - 934.99, the trade can be entered with the center strike at 930. If the trade is centered at 930, all other entry and adjustment guidelines should be modified accordingly for the higher strike.

DOWNSIDE MOVE: If the price of RUT is below 905.00, this will be over a one day, one standard deviation move (more than 10 points), which is outside our guidelines for trade entry. Do not enter the trade Wednesday. The trade entry dates are from 31 - 29 days to expiration; Thursday is 29 days so it can be entered Thursday if this downside move occurs.



TARGET GAIN AND MAX LOSS TRIGGER POINTS:

Target Gain: $250, which is 5% of maximum allocated margin ($5,000).

Maximum Loss: $500, which is 10% of maximum allocated margin ($5,000).

Your total "risk" in the position is the maximum allocated margin.

Trade is exited if either of these gain/loss conditions are met.


A trade update will be posted tomorrow.

Trade carefully,

Dot Hazlin