Bearish Butterfly ES July 2016

Yesterday, I have opened a bearish butterfly position on the S&P 500 futures. I am trading the ES futures options expiring in July 2016. It is centered at 2.060 points and has wings 70 points wide.

The strategy is very much based on what I have learned so far from John Locke, Sheridan Mentoring and ThetaTrends about butterfly strategies.

Strategy Setup

The goals is to earn 1.500 Dollars on a 5.000 Dollar position. One butterfly in ES can earn a maximum profit of 2.500 Dollars. Having two positions open it will be 5.000 Dollars -- that is going to be the ideal case. The strategy is, to extend the position by up to 2 more butterflies, if the market moves higher.

Take profit will occur when the market slides down. If it happens early, I will simply roll down the position for a small profit. If it happens late, the position will be closed.

The total delta of the position is -6 and the theta is 8. That means, I do earn 8 Dollars per day so far. The negative delta indicates that the position will earn 6 Dollars on every point the futures goes down and loses 6 Dollars on every point the future goes up. I do not want to be positive delta or negative theta.

Adjustment points

The next adjustment points are 2010 points on the down side. Once the future closes here, I will roll down the position.

On the upside, the adjustment will be made at 2110 points. In this case I will setup a second butterfly centered around 2090.

About Butterflies

If you have a look at the profit and loss diagram, you can see the high potential profit in the center of the tent at expiration. The center is formed by 2 short put options. At the same time, the potential loss on the wings is limited -- depending on the width of the wings. Those wings are created by buying a long put option below the short put and one above the short put. The same result can be achieved by using call options.

Also, the position can be transformed into an iron butterfly using a put spread and a call spread. Advantage of this setup is that there will be credit received while the put butterfly and the call butterfly do cost money to setup.

Which one to use depends on the personal preference of the trader.