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.

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