Bond Butterfly Trading Part 1

Trading butterflies can sometimes mean being creative and adapting to crazy market conditions. The creative aspect of trading butterflies involves forward thinking while figuring out new ways you will handle any market while protecting capital and yield. This process takes a lot of time, patients and backtesting.

In part one I will go over the set-up of my 30 year bond butterfly that I trade every month. Part 2 I will go over adjustments and advanced considerations when trading.

Technical analysis doesn’t come into play at the set-up of the position. However something that is more important which is the distance or time away from expiration. The days till expiration or DTE in my opinion is more important then the actual technical situation of bonds. The reason I say this is the technical situation will change very little or will have multiple standard deviations while in the position. So at the beginning I feel its not as important.

Now the type of butterfly that I like to set is an iron butterfly, iron meaning both puts and calls. I find that setting the wings or the distance from the center short strike is 5 points on the puts and 4 points on the calls. The different widths help with the position deltas at the start of the trade.

I like to put very little directional bias on the trade, so setting the butterfly  as centered as possible is where I like to start.

Heres the set-up, 40 DTE, at the money iron butterfly, 5 points wide on the put side and 4 points wide on the call side.

Below is the risk graph

BondsIn a few days I will post part 2 which will be all about adjustments and advanced considerations while trading bond future options.

Weekly View and SLV Trade Idea

The first chart that I have up is a weekly chart of the S&P. The first thing that I will look for is support and resistance lines. You can clearly see that the resistance up-trend line connecting the peaks is within a stones throw away from current prices. This area is around 1610-1615, and if I was a betting man, which I am, I would call that the top for the year only if we get there. Truly my gut feeling is that Thursday was the blow off top and we probably wont test that level for a while. Another noteworthy observation is the support up-trend line, that is the level that needs to be watched when we start the correction.

SPXSLV Trade Idea

With the recent pressure Gold as been under ever since Goldman put a sell/short alert out, Gold has been getting crushed, and I think Sliver is going to follow that crush lower as well. The chart below is a weekly chart, and you can see that this morning we will be breaking a very key level of 25.15-25.25. This level has been a big support level for over two years, and this morning we will be breaking that two year level. I think we will get a lot of selling below this point, stops getting hit and short sellers coming in. A very low risk trade would be cash secured puts. Because the market is not open yet I can’t price out where or when I would sell them, but I would look out a couple months and sell between 15-20. If you can get a good price for the 17’s I would sell them all day long.


SPX Outlook

When I’m putting my weekly outlook together, I am, most the time, early in my expectations. The last outlook I put together I was showing my bearishness, and that had a lot to do with my economic view. With the slow rate we are growing as an economy I thought the S&P was crazy for breaking into 1570. But like any good option trader you can be wrong on the direction and still make money.

SPXThis outlook is for the next couple weeks. First off Friday couldn’t have ended anymore text book in my opinion, testing the up trending channel line (yellow line) almost to the penny then buying come in and we created a hammer-ish candle. The tape action on Friday feels like we might struggle around here or what I think is more likely is we rally up to 1580 within the next week or so. Ultimately with the slow rate the economy is growing and the amount we are up YTD in the SPX makes no sense to me, but over the last few years I know that the market can surprise even then most seasoned trader.

My conclusion is we remain intact with no further downside pressure with an upside target of 1580. And at my target I will suspect some resistance to form, some new shorts to be taken and possibly the blow off top that will accelerate our spring time correction.


SPX Outlook

The last couple weeks have been very interesting. And today I wanted to put my opinion on the recent price action.

Looking from Feb 19th to today looks very sloppy. Price has been very choppy with no real direction except sideways. From the high of 1530 I have drawn a down trend line (in yellow) and from the corresponding low, I drew an up trend line. In doing so we have identified a symmetrical triangle.

Now that I have pointed out the obvious, I want to put my prediction on which way it will breakout.

There are a few things that I have too consider, first I need to consider we might be in a topping pattern. And second I need to consider the statistics with symmetrical triangles in a “bull” market.

I have witnessed many short term tops, and this certainly feels like we are forming a top. In a typical short term top you will see dips get bought with no new high. Next, when buying is finished we sell off back to where the buyers stepped in. This action is what causes the symmetrical triangle in the first place.

The other thing is the statistics of a symmetrical triangle in a bull market. Looking at the numbers it seems to favor the upside breakout, but by a small margin. The statistics of a downward breakout in a bull market is 7 out of 10, and the upward breakout in a bull market is 8 out of 10.

So my prediction is a downside break to the 1460 level. I came to this because of the small margin on the actual statistics and the price action of a topping pattern.


SPY Butterfly Update

Jan 30th (click on the date to find out more) I posted a new butterfly style that I am testing out on the SPY. And I have to say that it is very easy to manage from a greek stand point. I will be replacing this type of butterfly with the current style I am trading for the next cycle. Below is a risk profile of the current position. SPY

SPX Butterfly March

Today I’m setting my income butterfly for March. This is my normal approach to butterfly trading. I am however tweaking the system and eventually I would like to put the new style of butterfly to work in a bigger way. A few posts ago I posted a risk profile of a SPY butterfly that I was trading with the new management rules. Currently that position is working out well and below you can see the risk profile of both butterflies.



S&P vs Dollar vs Bonds

I came across an interesting dollar index chart.  Now I am not trying to call a top, but we might be getting close if you analyze the Dollar vs S&P vs 30 year Bonds.

On the dollar chart we are in a choppy channel. Currently we are at the bottom end of the channel, and we are testing the fib line for the fourth time and we can see a positive divergence on the RSI with every test. Every test of the fib line we got a small pop in the dollar. If history continues to repeat we should see a small pop in the dollar.


We need to compare the slightly bullish outlook on the dollar index with the S&P. On the S&P (/ES) chart we see the opposite. The S&P is strongly trending higher with a potential of 1518 as a test before we see any potential weakness. But with the DX in position to have a prospective pop, I believe we could certainly see some weakness in the S&P.


Now for dollar strength and S&P weakness we should see some positive technicals for Bonds. I think the chart is suggesting some short term strength. The reason for this is a first test of the 50% retracement and a slight positive divergence with the RSI. Now we could see Bonds go lower until a full test of the down channel, giving the S&P time to test 1518, but the Dollar is the real decision maker on this one. If the dollar has a inside day allowing the S&P to test, then I think Bonds will test as well. But on the other hand if the Dollar shows strength we might not see a test on either one.


So my conclusion is that the Dollar is going to be the real decision maker on when we see a pullback in the market. If we continue to see the dollar struggle then my analysis  on the markets are inapplicable. And we could see the S&P continue to grind higher.