August 16 S&P 500 Bearish Butterfly Adjustment

Last week after the BREXIT announcement I have opened the August Butterfly position. Although the markets were down on Friday and Monday, since Tuesday we can see a very strong recovery in the US markets. Currently, we S&P500 is again at 2,100 points near its all time high.

Adjustment to the Upside

The adjustment points on the upside at 2,050 points were triggered on Wednesday. I added another butterfly to the position centered at 2,040 strike price. The long wings are 70 points wide at 1,970 and 2,110 based on the S&P 500 Future (ES).

The new adjustment points move to 1,960 and 2,090 points.

Since then, S&P 500 continued to rise sharply and triggered the 2,090 level already. Up to now, I did not do any further adjustment.

The new position looks as following (click the picture to zoom). Don't get confused with the strikes, because TWS uses the SPX underlying for the diagram, that trades a few points higher than the September-Future.

Worth to note is the T+0 line which is not that flat anymore. If the markets rise, the position will get under pressure faster.


Depending were we will be heading on Monday, there are two possible alternatives.

1. I can wait and see, if the the resistance level stops the S&P 500 from a further move upwards.

2. I can add the next Butterfly, that would be centered at 2,070 or 2,080 points. This time, I would narrow the upper wing a bit. So I could reduce negative delta and limit losses.

If the market really breaks through the resistance, I would have to close the position for a loss and wait for a better entry later this month.


S&P 500 Butterfly July 2016 Closed, Open August Butterfly

Last week was really heavy. The BREXIT vote was all over the news and markets went crazy.

Still, my bearish butterfly was doing just fine. On Thursday and Friday, the wings at 2130 and 1990 came under pressure. It is not very often to experience a touch of the upside and a touch of the downside between 24 hours. That was a move of more than 100 points in S&P 500 Index -- Americas widest stock market index consisting of the most important companies of the country.

After the position has been opened on Mai 26 for a debit of 16.75 $, I decided to close the butterfly on Friday after the huge market drop for a credit of 23.00 $. I managed to realize a profit of 277 $ for holding period of one month.

Open of Butterfly August Position

To make use of the high volatility on Friday, I chose to open the August-Butterfly already. The Butterfly is centered with 2 short puts at 2.000 Strike. The wings are at 1.930 and 2.070 points. The chart shows the adjustment and the new lower range.

The high VIX above 25 allowed to buy the butterfly for 8.50 $. If the S&P 500 closes above 2.050, another butterfly will be opend at a higher level. Below 1.950 the butterfly will be closed and rolled down. The target is, to earn a profit of 1,000 $ before July 15. The expiration graph below shows the profit range of the whole position.


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.


Short Straddle Option Strategies on SPX and RUT

Based on Short Straddle Option Strategies Dave published some highly interesting information about his straddle backtests.

So far, it supports my understanding, that Straddles are a great way to earn consistent income from options.

Being an Option Seller, all factors come down on managing risk and premium income well enough to earn profits on a regular basis.

Source: DTR Trading

Let me quote some results from Daves statistical research:

In general, we can see in the table that, to collect 10% of the credit received (10% profit taking level) required a trade duration of roughly 30% of the entry DTE. At the 25% profit taking level you needed to stay in the trade around 60% of the entry DTE. For the 35% profit taking level it was about 70% of the entry DTE; 45% profit taking took your trade duration to about 80% of the entry DTE. These estimates are for the non-IVR filtered strategy variations.

First of all, you can generally show that higher profit targets force you to stay longer in your position. If you think about it, that result make totally sense. Profits are usually coming from time decay and a loss of volatility. While time will pass by automatically, you have a a fifty fifty chance on rising or falling vola (unless you enter the trade at very high implied volatility levels).

So the more you want to earn -- the longer you will have to wait.

Now for the last table...total non-compounded returns by strategy variation. The non-IVR filtered variations had the highest returns, which is related to these variations having the most trades (100+, see table above). In general, the trend is for higher returns with higher DTE.

At the same time more days to expiration (DTE) increase your profit propability and your returns. Longer DTEs increase the time value of your sold options giving you more time to hold your position. At the same time, longer option plays are less volatile and reduce risk on larger stock market swings.

The third table shows the win rate for all of the strategy variations. The highest win rates occurred at the 10% profit taking level, regardless of IVR filter level. Most of these particular win rates were in the 90% + range. For the IVR > 50% filter, the high win rates spanned multiple profit taking levels. For the non-IVR filtered variations and the 25% profit taking level, we see many win rates at or above 80% across most DTE. For a monthly straddle trader, this isn't a bad win rate.

If you only go with 10% profit target, your chance of winning is almost always at least 90%. The problem of volatilty flips at the same time, if you do those trades on a regular basis with a high stop loss level. The reason is, that volatility is high and you can earn huge premiums here. But high vola also means huge swings in the underlying that will increase your risk of getting kicked out of the trade with a loss before you can earn your profit. A profit target that is too low also needs more time to earn back your losing trades.

So far from what I learned, a good profit target is around 25% to 35% of the received option premium. At the same time, I would put a stop loss target that is around double or triple of your profit target. Let's say, you take profit at 25% than my maximum loss to take would be 50% to 75% at best. For a profit of 35% you should give space for up to 100% of the premium received.


Short Butterfly Dec 2015 - Performance Report Week 43/2015

We ended last week with a strong run up on 3,450 points which is kind of over my preferred range of 3,400 points. From here I am already in the zone of losses. Having 3 short call options open means, with every point up from here I lose 30 EUR. That is kind of the situation I would like to avoid.

Because of that I have opened the next short put option at 3,550 points on Friday to give me a little room to breath. But after crunching the numbers on the weekend I figured out, that this step does not really do the trick yet. One put option still means there is 2 naked call options costing me money on the upside. In fact, my protection begins at 3,700 points where I have bought my long call options. Running up another 250 points would mean a loss of 2,500 EUR alread for those 2 options plus another 2,000 EUR for the third call starting after 3,550 points.

To understand the positioning to the fullest, you can have a look at my position table down below. So far, I am delta negative, which means, on markets moving higher I lose money. Markets going down will make me some money.

As we are already in Tuesday night as I am typing those lines, I have to admit, that the strategy was not optimal for this period once again. The market made a strong move from less than 3,000 points up to 3,450 points leaving me with a wide range and no clear restistance at the current level.

So far, I will close out the low call at 2,950 points and take profit an the lowest naked put option at 3,150 points. That means, my range moves a bit higher. At the same time, due to my payments to close the call option, I am running out of premium to get my complete position in a win.

What are my possibilies now? At first, I could sell another straddle at 3,450 points to narrow the net and earn round about 200 points here. That would offer me a nice buffer. My new range would be between 3,300 points and 3,500 points. If we moved down again, I could sell another straddle at 3,250 points. So my range would widen again a bit from 3,200 to 3,500 points.

What I do not like with that idea is the essential risk on the upside. I really have to think through if I try to work that out or if I cut losses and focus on the next month.

As I will be on holiday in the Philippines with my wife in November, I feel that closing out and having a good off time would be the better choice. I will have to decide until Friday...


Short Butterfly Dec 2015 - Performance Report Week 42/2015

Last week, EuroStoxx 50 closed above 3,260 points. Volatility keeps on going down. Currently, I am still facing some losses due to high expenses for insurance in September and October. For my next trading period, I will try to keep those expenses low. I figured out that options valuation is more stable with expireation some months out. That means it could make sense to reduce protection in the beginning and buy better insurance a month or two later.

The maximum profit is at the moment around 3,700 EUR. Focussing on my profit target of 50 % of that we still have a long way to go. The position is at risk if the EuroStoxx 50 moves above 3,400 points or below 2,800 points. To me that feels like a pretty comfortable profit zone right now.

The question is, what do I do if me move further up. Chart show bearish resistance between 3,300 and 3,400 points. If we move closer to 3,350 points I would feel extend my position at 3,250 and 3,450 points. At the same the short call option at 2,950 have to be closed if possible. Or will will buy one FESX future to cover the position.


Short Butterfly Dec 2015 - Performance Report Week 41/2015

Just in short the results from last weeks trading: The European market went sideways and tended slightly upwards. All short options are completely in the range. I closed my protective put option spread during the week, so that I am naked on the downside now. I feel fine taking that risk as I am still short 2 call options at 3,150 and 2,950 points that should provide me some buffer. But still, I am shooting for another spread until December for less than 20 points below the strike of 3,000 points. At the moment, the spread at 2,750/ 2,950 comes into my mind trading at 24 points.

The maximum profit can be reach if we close in December at 3,150 points. As I am planning to close early in November, I am still monitoring the market every day. The volatility came down a lot since the the last drop at the end of August.

Next steps need to be take at 3,450 points (selling short call) and below 2,950 points (selling short put). The October long call protection at 3,400 is going to expire worthless. I think I will add another one after I got my bottom line safe with new put option protection.

At the moment is earnings seaons and you never know what the next day will bring!