SPX May 1 Iron Butterfly at the close today
SPX closed today at 1597.57, closing higher than the previous all-time high of 1597.38 reached on April 11. This makes me wonder if the "Sell in May" philosophy will hold true; time will tell.
Our position delta is -9 and theta is 108, so overall a very good theta/delta ratio of 12:1.
The decay/theta on this week's position has been much slower than other weeks. This could be related to the FOMC announcement coming out Wednesday at 2 pm est. I have been in this trade during FOMC announcements before, and it seemed the market makers held onto the decay until after the announcement. Decay usually comes out of the position more quickly; improving the p/l. The other side of that coin, however, is the risk of price movement as a result of the announcement. Some traders may choose to exit the position prior to the announcement. Holding the position until Thursday increases the gamma as well as price risk, so caution is advised. Unless you are very experienced with this strategy, I do not recommend staying in the position until Thursday.
Our next adjustment trigger points are now the short strikes. I have the following thoughts I want to share with anyone considering staying in the position until Thursday:
If SPX approaches the next adjustment point, I recommend asking yourself the following questions: Has the market made most of its move this week? Is the market moving quickly against my position? Is SPX near support or resistance? How much time is left in the position until it expires? I've said before that whenever possible, I try to exit the position by the end of the day Wednesday or Thursday morning at the latest. Is there economic news being released that could potentially move the market?
The answers to these questions will help you decide if you should remain in the trade, or exit the position. If you feel that SPX has made most of its move and will not move much further, and as long as your position is not near max loss, you could consider rolling the threatened side 10 points rather than 20 points. The 10 point roll will cost less money, however, the risk is that the 10 point roll may not allow enough room for further movement in the direction of the roll.
What is most important when adjusting either to the upside or the downside is to analyze your new proposed risk graph before making the adjustment. This will help you determine the amount of credit remaining in the trade after the adjustment would be made. The "art" of managing this position comes with time, which is why I recommend paper trading it through some weeks that require adjustments before trading it live.
A summary of the new closing order for our target is:
- Original position 15.70 Credit
- Call Roll adjustment 10.10 Debit
- Closing Order 4.00 Debit
- This will gross 1.60 gain, less commissions to net 1.50 or $150.
Given that this week's position has been adjusted, it may be a trader's choice to exit the position for less than the target gain, or even breakeven. The FOMC meeting began today, and the announcement is due out Wednesday afternoon. I sometimes will exit positions early prior to such a release for a small gain or breakeven. Remember that there are many opportunities to trade weeklys throughout the year, so a gain less than target still adds up towards your annual goal.
An update will be posted tomorrow.