Here is a monthly RUT Iron Butterfly, which has a very simple and basic trade management structure.
Last week I mentioned I would begin sharing a monthly trade I trade on a regular basis on the RUT. The trade is an Iron Butterfly, with 50 point wide wings on both sides. The short option is placed at the strike closest to the underlying price (ATM, or At-The-Money). The trade is entered in one order, by selling an Iron Condor.
The trade is entered 31 - 30 days from expiration. The next entry, for the May cycle, will be April 16 or 17. This article covers the basic guidelines for the trade. I wanted to share them with you so that those with back testing capabilities can begin to test the strategy before the live entry date.
Below is a graph of a sample RUT Iron Butterfly.
RUT Monthly Iron Butterfly
- 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. 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 9 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.
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.
- When the price of RUT moves up or down 10 points from the center strike of the Iron Butterfly (IB), 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.
After the first adjustment is made:
1) If price movement continues in same direction another 10 points, roll the opposite (non-threatened) side up/down to an ATM IB. This adjustment is also made in one order; it will result in a credit as the order entry will be to "Sell Condor" (all calls on the upside or all puts on the downside).
2) If price of RUT reverses back 10 points to original center strike, â€œun-adjustâ€ or reverse the adjustment back to the original position. This adjustment is also made in one order; it will result in a credit as the order will be to "Sell Condor" (all calls on the upside or all puts on the downside).
The trade is designed to always be an ATM Iron Butterfly, or a 20 point wide Iron Condor. Adjusting every 10 points helps stay ahead of market movement.
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 always, it is recommended to back test the strategy thoroughly, and paper trade it before putting on a live position. It's always best to have a complete understanding of any new trade, including adjustments, before putting one's own money in the position.