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.