Trade Idea: SPX May 6th 4025/2 x 4125/4175 Broken Wing Butterfly
In previous market environments, my go-to strategy in SPX was the short put vertical, but if you've been around the past several weeks and had those on, you probably did a bit of sweating as price moved into the spread, took some loss on those that were fully in the money (only to scream as price whipped back the other way), and or wished that you had a setup on that you could play "elevator up/down" with.
Pictured here is an alternative strategy that is mildly net delta long, has positive theta, will beneficially benefit from a move into the butterfly's "body," and has similar ROC metrics as the 16 delta short leg spreads I ran previously -- the "broken wing" butterfly.
Here are the metrics for this setup, which I set up by selling 2 x the 20 delta's and then erecting my longs out from there:
Max Loss/Buying Power Effect: 45.00 ($4500) (Realized on a finish below the break even)
Max Profit: 55.00 ($5500) (Realized on a finish at the short put strike where intrinsic in all the legs converges on 0)
Credit Received: 5.00
Break Even: 4070* (No Upside Risk)
Probability of Profit: 87%
Delta/Theta: 1.88/7.20
ROC as a Function of Buying Power Effect: 5.00/45.00 = 11.1% at max; 5.6% at 50% max.
From a trade management standpoint, you will generally put these on as a unit and take them off as it unit, with the vast majority of take profits at 50% max since it will be extremely rare that you get a "finish" right at the body of the setup (i.e., 4125 with 0 days to go) and either aspect's converging on max generally won't occur until very late in the trade's cycle.
However, if you do get a move such that the long put vertical aspect (1 x 4125 short put/4175 long put) converges on max (50.00), you'll want to look to strip that aspect off, since that is the most you can make on it, either allowing the remaining short put vertical to "ride" or rolling it out for a credit. Similarly, if the short put vertical aspect (4025 long put/1 x 4125 short put) converges on max (0.00), you'll want to look to strip that aspect off, since that will be the max you'll be able to make on that aspect, then allowing the long put vertical aspect to ride. At that point, the remainder of your setup will be "risk free" since the risk in this setup is in the short put vertical aspect.
I'll look to piddle with one of these setups next week during my regular Friday routine and will post the trade if I get filled.
* -- Short put strike (4125) minus the width of the narrowest wing (50) minus the credit received (5.00).
Pictured here is an alternative strategy that is mildly net delta long, has positive theta, will beneficially benefit from a move into the butterfly's "body," and has similar ROC metrics as the 16 delta short leg spreads I ran previously -- the "broken wing" butterfly.
Here are the metrics for this setup, which I set up by selling 2 x the 20 delta's and then erecting my longs out from there:
Max Loss/Buying Power Effect: 45.00 ($4500) (Realized on a finish below the break even)
Max Profit: 55.00 ($5500) (Realized on a finish at the short put strike where intrinsic in all the legs converges on 0)
Credit Received: 5.00
Break Even: 4070* (No Upside Risk)
Probability of Profit: 87%
Delta/Theta: 1.88/7.20
ROC as a Function of Buying Power Effect: 5.00/45.00 = 11.1% at max; 5.6% at 50% max.
From a trade management standpoint, you will generally put these on as a unit and take them off as it unit, with the vast majority of take profits at 50% max since it will be extremely rare that you get a "finish" right at the body of the setup (i.e., 4125 with 0 days to go) and either aspect's converging on max generally won't occur until very late in the trade's cycle.
However, if you do get a move such that the long put vertical aspect (1 x 4125 short put/4175 long put) converges on max (50.00), you'll want to look to strip that aspect off, since that is the most you can make on it, either allowing the remaining short put vertical to "ride" or rolling it out for a credit. Similarly, if the short put vertical aspect (4025 long put/1 x 4125 short put) converges on max (0.00), you'll want to look to strip that aspect off, since that will be the max you'll be able to make on that aspect, then allowing the long put vertical aspect to ride. At that point, the remainder of your setup will be "risk free" since the risk in this setup is in the short put vertical aspect.
I'll look to piddle with one of these setups next week during my regular Friday routine and will post the trade if I get filled.
* -- Short put strike (4125) minus the width of the narrowest wing (50) minus the credit received (5.00).
Comment:
To get a smaller buying power effect, you can consider narrowing the spreads on each side: SPX May 6th 4060/2 x 4120/4150 (a 60 x 30), looking for a setup that (1) approaches a risk one to make one metric; (2) has an ROC as a function of buying power effect of greater than 10%; and (3) has a break even at or below the 1SD line. This narrower setup pays 3.50 on buying power effect of 26.50, 13.2% ROC at max, 6.6% ROC.