New Trade Idea for Couch Potato Trader Newsletter
I wrote in last weekend's update that I have been testing a new trade that I plan to incorporate into the Couch Potato Trader trade plan. This is a longer-term position, biased to the bearish side but with limited upside risk. Trade guidelines are below:
Bearish Put Broken-Wing Butterfly on SPX
Entry: 65 - 75 days prior to expiration. Can be weekly or monthly cycle depending on the entry day. Best entry is usually on a flat/slightly down day.
Capital Requirements: Minimum recommended size is a 3-unit position to give some flexibility for adjustments. Based on a 3-unit position, the maximum planned capital is $5,000. Actual starting capital will be in the range of $3,300 depending on the price of the butterfly at order entry. It is recommended to wait for the best fill possible, and to try to keep the price of the butterfly under $1.00. Fills can take awhile to execute because of the low open interest, it may take a day or longer to get a fill at a good price.
Target Gain: $500 for 3-unit position.
Max Loss: $750 for 3-unit position.
The target gain and max loss percentages may be modified from time to time depending on overall market conditions, time in trade, actual margin deployed, etc.
The goal is to exit the position approximately 30 days prior to expiration; but the trade can be carried until 14 days to expiration depending on the position status, etc.
- Upper long put strike is approximately 5 points higher than price of SPX at entry.
- Short put strike is 40 points below upper long put strike
- Lower long put strike is 50 points below short put strike
Below is an example of the position with SPX at 1889, using the April 5 weekly cycle (73 days prior to expiration)
SPX Example Put Broken Wing Butterfly
Based on the price of the butterfly for this sample trade at a $.10 debit, the initial margin requirement is $3,030 plus commissions. The gross margin is $1,000 per unit plus the cost of the butterfly.
It is recommended to take no action for the first 30 days after entry. After 30 days in the position if SPX is 30 points or more above the upper long strike, roll down upper longs one at a time to raise the upper expiration graph.
If the price of SPX drops to the lower 1/3 of the expiration risk graph, roll short strikes as needed to flatten position delta. Another possible downside adjustment is to purchase a put debit spread to flatten the deltas also.
These are the general trade "guidelines", not concrete rules, and may be modified as time goes on as it is a new trade strategy for the newsletter.
As with any new trade strategy, it is recommended to paper trade until the position is thoroughly understood before risking live capital.
Depending on overall market conditions later this week, we may be entering this position for the April 5 cycle. A recommended trade entry will be published at that time for those who may be interested in this longer-term, "Couch Potato" play.
As always, please feel free to email if you have any questions on these basic guidelines.