RUT November Iron Butterfly Guidelines
I thought it was prudent for me to re-publish the guidelines as a separate article after entering the new November position. For those of you who have been trading this monthly strategy, you will also see a few additional notes that may be helpful for trade management.
RUT Monthly Iron Butterfly Guidelines:
- It is recommended to enter the position between 31 - 29 days prior to expiration.
- Wait at least one hour after market open before entering. Exact entry time is trader's choice.
- 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.
- 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.
- 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.
The trade is a 50 point wide, "at the money" Iron Butterfly. As an example, if the price of RUT were at 1116, the order would be:
SELL 1120 Call.
BUY 1170 Call.
SELL 1120 Put.
BUY 1070 Put.
Credit will vary depending on the price of RUT and the volatility at the time the trade is entered.
Planned maximum capital allocation is $5,000 per contract (width of the wings). In a Reg-T account, your broker will hold the $5,000 less credit received as maximum margin/risk and option buying power. (Example: $5,000 margin less $2,500 credit = $2,500 buying power effect before commissions).
Target gain is 5 percent of planned maximum capital, or $250 per contract. Trade is to be exited if a 10% loss (again, based on maximum allocated capital), or $500 per contract.
The basic trade management guidelines are as follows:
Try to adjust once per day whenever possible, I usually wait until the end of the day unless the market is moving very quickly against the position. I also try not to adjust the position on the day of entry.
- When the price of RUT moves up or down 10 points from the center strike of the Iron Butterfly, roll the "threatened" side up 20 points if it is an upside move, or down 20 points if it is a downside move. This results in a 20 point wide Iron Condor. This adjustment is made in one order; it is a Condor Roll of all calls or all puts, depending on the side being adjusted. At times, depending on the strength of the move, it may be recommended to further reduce the upside risk by moving in the long wings 10 points at the time of the adjustment. This would then make the wing width 40 points on the call side.
Please also note that when the downside adjustment trigger is reached, it may be acceptable to wait a bit longer before adjusting, depending on position deltas and status. Using the new November position entered earlier today, RUT is currently at 1110.65. However, as you can see from the graph of the current position, it is still in positive territory, and is still negative delta so there is no need for an immediate adjustment.
RUT November Iron Butterfly:
- If price movement continues in same direction another 10 points, roll threatened side up or down another 20 points.
Depending on the cost of the second adjustment, it may be necessary to roll down the "non-threatened" side for additional credit in the trade. However, this does open the door for the classic "whipsaw", so I recommend only doing this if more credit is required to attain target.
If necessary and RUT continues to move in the same direction, roll the threatened side once again another 10 or 20 points. At this point after adjustment #3, it probably would be necessary to roll down the opposite side to get more credit in the trade. It is a trader's discretion on how far to roll the "non-threatened" side for the reasons I mention above (whipsaw).
If you have questions on the basic trade setup, please send me an email. Trade entry recommendations will be posted the day prior to entry, as well as suggested adjustments throughout the cycle of the trade.
As always, it always a good idea to paper trade any new strategy before putting on a live position. It's always best to have a complete understanding of any trade, including adjustments, before putting one's own money in the position.
As always, stay keen on your risk management and trade carefully,