How can you manage large market moves while in a live weekly position?
The gap on Friday morning brings up two areas for discussion regarding market movement and how they can be managed if you're in the weekly SPX Iron Butterfly. What if the underlying gaps past my adjustment point? What if the underlying whipsaws back in the opposite direction after I've adjusted?
I'll address each question separately, with my thoughts on how to manage the SPX weekly trade accordingly.
What if the underlying gaps past my adjustment point?
The general guideline for adjusting the SPX weekly iron butterfly is when SPX moves +/- 10 points from the center strike; roll the threatened side up or down 20 points. If the market gaps beyond the adjustment point (more than a 10 point move), it is recommended to roll the threatened side further out, so the short call or short put is out of the money. The series of graphs below illustrate the standard adjustment, as well as recommended alternate adjustment in the event of a gap.
This is the original position:
SPX Iron Butterfly centered at 1560
In the graph below, SPX moves down 10 points to 1550. A standard adjustment of the 20 point roll of the put spreads re-centers the trade at the current price.
SPX Iron Butterfly adjusted 20 points
The next graph below illustrates SPX gapping down to 1540, past our normal adjustment point of 1550. This graph shows the standard adjustment, which puts the new short strike at 1540. If you feel the gap will fill in, the standard 20 point roll may be sufficient. By filling in I mean the underlying price may move back towards the price before the gap.
SPX at 1540 Adjusted Position
The next graph below shows another alternate adjustment, which is to roll the threatened side, in this case the put spreads, a bit further. This can be used if you don't think the gap will fill in. Here is an example of a 25 point roll, placing the new put spreads at -1535/+1505. This adjustment will cost more than the standard adjustment, but will give a bit more room if the price continues down.
SPX at 1540 with 25 point roll
What if the underlying whipsaws back in the opposite direction after I've adjusted?
Every trader has been caught in the classic whipsaw. A whipsaw is when the underlying reverses in the opposite direction after an adjustment has been made. In the case of the SPX weekly iron butterfly, this whipsaw can be managed effectively.
The series of graphs below illustrate this:
This is the original position:
SPX centered at 1560
The next graph below illustrates SPX moving down 10 points to 1550; the standard adjustment of a 20 point roll of the put spreads is made. This graph shows the adjusted position:
SPX at 1550 with standard 20 point adjustment
In the graph below, SPX whipsaws back up to 1560, the original center strike. Your position could have already reached target gain at this point and you may have exited the trade. This graph shows the position after the whipsaw:
SPX at 1560 after adjusting 20 points to downside
In the graph below, If the position is not at target gain or max loss, you can also roll out the call spreads to create a very wide Iron Condor. This allows more room for upside movement. In this example, the calls are rolled out from the original -1560/+1590 to -1580/+1610. The graph below illustrates the new position:
SPX Wide Iron Condor
I hope that the above visuals give you a clear picture of how the SPX weekly Iron Butterfly can be managed in "less than perfect" market conditions. There are variations to the scenarios that I've shown that will become second nature to you as you learn and trade the strategy. Remember, trading is "an art and not a science."
The next trade entry for the SPX weekly will be Thursday, April 10, for the April3 cycle which expires April 19. Trade entry recommendations will be posted next Wednesday.
Trade safely, everyone!