SPX Butterfly

Yesterday I set my monthly SPX butterfly. If you’ve been following my blog then you know that I set one of these trades every month. This month is no different, even though its not ideal to trade a negative vega trade with currently IV at extremely low levels. I have plenty of experience trading butterflies in low vol environments, and one thing that helps my trading is to lower you profit target. A normal month when IV is above 20 or so I will typically aim for 15% margin, but in a typical expo month I’m rarely this bearish. So the first opportunity that I have to exit my position up money I will.

The reason I’m more bearish then normal is simply put, the chart! My view is that we are approaching the target area on the fib retracement, which in turn should be faded. Now the actual fade might last a few days putting the cash back to the 1375-1380 level. I think the mentality of the market right now is to buy dips, so I think that 1375-1380 level might be a decent area to reload or take off bearish bets. But this is a double edge sword, meaning the more bearish I hear things the more bullish I get. But I will rely on the charts for some indication of future direction.

The trade below is the risk profile of my monthly SPX butterfly. My first target for adjustment is 1425, which at that point I will add a put fly and a call fly with anticipation of higher prices.

I’d also like to share a weekly fly that I have been doing with great success the last few weeks. The weekly options that I trade are on SPX, and the strategy that I use is a butterfly. But set-up a bit different then the monthly. Below is a risk profile of my currently weekly fly. Looking at this fly I think someone would suspect that I am very bearish, but in reality I have been trading these weeklies the same for the last few weeks, and all the market has done is go higher. This is a very simple and very straight forward approach to trading a fly. The adjustment is a simple vertical, so basically I will turn this fly into a short put spread.

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3 thoughts on “SPX Butterfly

  1. Hi Phillip. Just to clarify… on your weekly fly, you set it up bearish, but when it breaks above the upper tent, you turn it into a short put vertical with that adjustment trade? In a reversal or whipsaw, what is your exit point of the vertical? Your risk increases in this adjustment, but I’m guessing that since this is a weekly, you see it as a hit-and-run adjustment on Wed or Thurs?

    Yes, this low vol and low volume pump seems ridiculous and is a real mind bender for fundamental analysis as the world seems in a tough spot. I have been putting on a lot of long straddles and strangles now, trades I usually avoid as I hate time decay. But there has either got to be a big upside breakout, or a melt-down as the wedge on the index charts looks ready to explode. I think even a market break higher will be accompanied by higher vol. Also, backspreads on SPX or even the VIX options, look to be winners.

    • Hey Graham, I set the weekly outside the tent. The reason I do this is because I want to pay a smaller debit for the trade. My plan on this trade is to risk my debit to make my debit 1:1. My percent returns are between 30% and 75% per week. Now if I have to adjust my margin increases, but I still just risk the original debit. So if I get a whipsaw I will simply take the trade off . As for the adjustment, if I have too, I will try and set that no earlier then Wednesday. I figure most if not all of the premium will be out by Thursday afternoon or Friday morning.

      I don’t typically buy straddles or strangles, but with vol so cheap, its probably not a bad trade. I’m actually looking at a back spread now on QQQ.

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