Not quite a monthly; not quite a weekly. A new SPX Iron Butterfly is in the "Test Kitchen".

I have been searching for a new trade strategy to include in the trade plan that is not quite as long-term as a monthly, and not as fast-paced as the weekly SPX Iron Condor. The trade is an SPX Iron Butterfly entered either 14 or 15 days to expiration, for the appropriate weekly cycle. For example, a trade entered today would be for the December (regular monthly) cycle.

Entry Guidelines:

- 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 SPX moves +/- a one-day, one standard deviation, do not enter the trade until the movement is less than a one-day, one standard deviation.

- If the Average True Range (ATR) is at the high end of the range, the trade will not be entered for that week, as the likelihood of having to adjust sooner will be higher than with an ATR in the lower end of the range.


Trade Setup:

The trade is an ATM ( "at the money") Iron Butterfly with 25 point wings on the call side, and 30 point wings on the downside. As an example, with the price of SPX currently at 2070, the entry position would be:

SELL December 2070 Call.

BUY December 2095 Call.

SELL December 2070 Put.

BUY December 2040 Put.

The goal at entry is to have position deltas in the range of -3.00 per contract.

Below is a sample position if it were entered today:

SPX 14-Day Iron Butterfly:

Credit will vary depending on the price of SPX and the volatility at the time the trade is entered. Credit as of this writing for the position example is $20.45.

Planned maximum capital allocation is $3,000 per contract (width of the widest wings). In a Reg-T account, your broker will hold the $3,000 less credit received as maximum margin/risk and option buying power. (Example: $3,000 margin less $2045 credit = $955 buying power effect before commissions).

Target gain: 5% of actual margin/risk, or $47 using this same example. Trade is to be exited if an 8% loss is reached, or ($76) using the trade as outlined.

The basic trade management guidelines are as follows:

The trade is to be adjusted at either expiration breakeven. In the position shown above, the breakeven on the upside is 2090.40, and 2049.56 on the downside.

How to Adjust:

At either expiration breakeven, there are two adjustment scenarios, depending on the market movement at the time the adjustment is required, as well as length of time in the trade. The goal with either adjustment is to cut position deltas at least in half.

The basic adjustment is to roll the threatened side to cut position deltas in half. Using the same sample trade, the upside adjustment is outlined below:

1) Upside Adjustment:

- BUY 1 December 2070 Call.

- SELL 2 December 2095 Call.

- BUY 1 December 2120 Call.

This adjustment can be executed with one order: "Buy Butterfly", and will now put the new call strikes at -2095/+2120, still 25 points wide.

If this adjustment is not sufficient to cut position deltas at least in half, the threatened side can be rolled more or less than 25 points, depending on the move. An example would be:

- BUY 1 December 2070 Call.

- SELL 1 December 2095 Call.

- SELL 1 December 2100 Call.

- BUY 1 December 2125 Call.

This adjustment can also be executed with one order: "Buy Condor", in this case all calls. The new short strikes using this condor roll would be -2100/+2125, still 25 points wide. At times, depending on the market, it may also be necessary to shorten the width of the wings on the call side to 20 or even 15 points. This would be determined at the time the adjustment is called for.

The same procedure would apply for adjustments to the downside, except it would be rolling the puts rather than the calls if the lower breakeven of 2049 is reached.

I am not recommending this as a live trade yet. I will paper trade it the next few weeks, analyze the results, and hope to add it to the Trade Plan after the first of the year. It may be a viable mid-range strategy to supplement the portfolio, or a less intensive trade for the Couch Potato trader than the weekly Iron Condor.

Please don't hesitate to email me with any questions on the trade setup/management; I will consider entering a paper trade next week for the December 4 weekly cycle. Please also note that these guidelines may be modified as some additional data is collected on results.

As always, stay keen on your risk management and trade carefully,

Dot Hazlin