Creating this journal to log and share a weekly strategy in using butterflies.
Premise: On expiration days equity prices tend to pin around the strike with the highest open interest. (Would love to have historical data to prove this and have posed this question on another forum in ET)
Strategy:
1. Identify equities with high IV rank and decent liquidity where open interest in the options expiring on a weekly basis have a demonstrated open interest higher at one strike than the others.
2. Enter a 1:3:2 or 1:2:1 broken wing butterfly targeting the short guts at the strike with the highest open interest. The initial position will have a directional bias with the opinion that the underlying equity will move towards the strike with the highest open interest. These spreads will be entered with a net credit that covers all execution costs and provides a winning trade if the equity moves counter to the strike with the highest open interest.
3. Profit / Loss Maximum profit met with the stock at the strike price with the highest open interest on expiration. Minimum profit is the credit received. Max loss on each trade follows the usual butterfly set up and occurs is the stock moves up through the long wing with calls or below the lower wing with puts.
4. Risk management - Max risk on each trade will be no more than 1% of my tradeable capital.
5. Trade management - using the broken wing set up provides and initial credit. Once the trade is on if the underlying moves away from the strike i will roll down the broken wing in calls and up the broken wing in puts to balance the spread. Ideally I will pay no more than half the initial premium collected to make this adjustment. The adjustment narrows risk and balances the trade. Profit zone when ITM will be set at 35% of max profit but may be adjusted up or down on expiration day based on market conditions. Risk of early exercise on the short guts will hopefully be minimal but if happens will be offset by exercising the long wing and then trading out of the remaining spread. This should not exceed in a worst case scenario the original max risk.
My goal will be to initiate two of these trades each Monday. Will post any adjustment or rolls midweek and over the weekend the final results from that week. I plan to use the journal for about two months to provide a transparent analysis of whether this strategy is successful or not for a total of 16 trades. I'll then provide a complete breakdown of number of winners / losers and total return.
Open to feedback for sure. Appreciate the comments on the options forum and advice that I've incorporated into this strategy from a number of posters. Looking forward to piloting this and also to the accountability the journal page can provide.
For the sake of giving this strategy a name I'm going to go with "Butterfly Crush". Full disclosure my ten year old daughter liked the name but asked me not to smash real butterflies.
Premise: On expiration days equity prices tend to pin around the strike with the highest open interest. (Would love to have historical data to prove this and have posed this question on another forum in ET)
Strategy:
1. Identify equities with high IV rank and decent liquidity where open interest in the options expiring on a weekly basis have a demonstrated open interest higher at one strike than the others.
2. Enter a 1:3:2 or 1:2:1 broken wing butterfly targeting the short guts at the strike with the highest open interest. The initial position will have a directional bias with the opinion that the underlying equity will move towards the strike with the highest open interest. These spreads will be entered with a net credit that covers all execution costs and provides a winning trade if the equity moves counter to the strike with the highest open interest.
3. Profit / Loss Maximum profit met with the stock at the strike price with the highest open interest on expiration. Minimum profit is the credit received. Max loss on each trade follows the usual butterfly set up and occurs is the stock moves up through the long wing with calls or below the lower wing with puts.
4. Risk management - Max risk on each trade will be no more than 1% of my tradeable capital.
5. Trade management - using the broken wing set up provides and initial credit. Once the trade is on if the underlying moves away from the strike i will roll down the broken wing in calls and up the broken wing in puts to balance the spread. Ideally I will pay no more than half the initial premium collected to make this adjustment. The adjustment narrows risk and balances the trade. Profit zone when ITM will be set at 35% of max profit but may be adjusted up or down on expiration day based on market conditions. Risk of early exercise on the short guts will hopefully be minimal but if happens will be offset by exercising the long wing and then trading out of the remaining spread. This should not exceed in a worst case scenario the original max risk.
My goal will be to initiate two of these trades each Monday. Will post any adjustment or rolls midweek and over the weekend the final results from that week. I plan to use the journal for about two months to provide a transparent analysis of whether this strategy is successful or not for a total of 16 trades. I'll then provide a complete breakdown of number of winners / losers and total return.
Open to feedback for sure. Appreciate the comments on the options forum and advice that I've incorporated into this strategy from a number of posters. Looking forward to piloting this and also to the accountability the journal page can provide.
For the sake of giving this strategy a name I'm going to go with "Butterfly Crush". Full disclosure my ten year old daughter liked the name but asked me not to smash real butterflies.
