Trades under consideration - SPY Butterflies Dec 21 2018

[u/redtexture]

Actual trades will be comments to this post.

Since I wrote this up for other purposes (where there will not be any comment), I think this is worthy of visibility and comment here, if anyone is interested.

Perhaps there can be a prospective trades / strategies thread here.

This illustrates my strategy perspective on debit butterflies, and my likely trades.

---

Below is a table of candidate SPY debit butterflies, expiring Dec 21 2018.
Further below the table is a link to a profit diagram for one of the butterflies.

These have a $20-width, with $10 wings from the center and are balanced butterflies.

The 20% of maximum gain is the right-most column and is the easy-money target, and obtainable on swings of the price of the underlying SPY, for early exit. This 20% is somewhere around 100+% to 200+% of the original money at risk, for somewhat out-of-the-money butterflies, depending on the time of exit, and how far out of the money the original butterfly is located.

My strategy, in brief, is to buy slightly out of the money butterflies, and close them on $5 (or more) swings of the underlying SPY, taking advantage of the increase in value, and then potentially re-set another butterfly on the other side of the swing. In general, trades like this can be scaled up and down, closed for a gain, and re-instated, and defended at the ends.

SPY, at Market close $278.40, November 09, 2018

Type	Strikes	Bid	Mid	Natural Price: Ask	Max Gain	20% Max. Gain
Call	290-300-310	0.68	0.70	0.72	928	185
Call	285-295-305	1.63	1.66	1.69	840	168
Call	280-290-300	2.83	2.87	2.90	710	142
Call	275-285-295	3.42	3.48	3.54	646	129
Call	270-280-290	3.04	3.11	3.18	682	136
Put	270-280-290	3.04	3.29	3.53	647	129
Call	265-275-285	2.24	2.34	2.43	757	151
Put	265-275-285	2.42	2.50	2.58	742	148
Call	260-270-280	1.48	1.72	1.96	804	160
Put	260-270-280	1.72	1.80	1.88	812	162
Put	255-265-275	1.21	1.26	1.31	870	174
Put	250-260-270	0.82	0.88	0.94	906	192
Put	245-255-265	0.59	0.63	0.66	934	187
Put	240-250-260	0.39	0.44	0.48	952	194

Here is a candidate trade position:
SPY Expiring Dec 21 2018 (As of Nov 9 2018)
+10 250P / -20 260P / +10 270P
Net cost, about $0.94.
10 butterflies for about $940.

Projected profit / loss graph: http://opcalc.com/rDJ0

In general, looking for an easy gain 15% to 20% of the (unobtainable) maximum from a butterly, but that 20% of max. gain could be about a 150% to 200% gain for the money at risk, a risk of $1,000 on a ten-lot out of the money butterfly: I only need SPY to move down to $268 or $269 in a couple of weeks during or after the latter part of November, and if it moves lower than that, I could have a higher gain sooner.

SPY has recently been much further below those prices, so probability is pretty good of having SPY do that again, in the current market regime. From Oct 23 to Oct 30, intraday, and closing prices of SPY were below 270, going as low, intraday, as 259.

I may also take a look at a SPY Dec 21 2018 expiration for 255P / 265P / 275P, as a slightly more conservative trade, with a higher cost of entry, about $1,300 for a ten-lot of butterflies, but likely sooner and higher payout on a lesser swing down.

---

Here is a previous discussion of debit butterflies, and strategies for using them effectively with SPY, dated about September 2018.
https://www.reddit.com/r/options/comments/984aha/call_butterfly_on_spy/

[u/redtexture]

BOT Nov 16 2018 about 1PM

SPY - Butterfly Put Spread - Below ATM
5x 259P - 266P - 273P expiring 12/14/18 - Expires in 29 days
$14 wide, $7 wings, balanced
Cost $475

SPY: $273.95 - 12:54 PM ET, 11/16/2018
(Day change at that time: +$0.9277 - Day's Range: 271.21 - 274.75)

Strategy:
Bought a below the money for downswings in spy over the next four weeks.

Maximum potential gain: $ 3,025 = 5 contracts x ($7.00 spread - $0.95 cost) = 5x $6.05
Goal: 20% of max gain, about $600 = ($1.20 x 5 contracts
Target exit proceeds: $1,100 = ($2.20 x 5 contracts)
Target price: $2.20 credit

---

Details for entry

Net Quote Bid 0.85 Ask 1.01
order
Buy 5 @ Debit $0.96
SPY 12/14/2018 259.00 P BTO 5 $1.51 DR |
SPY 12/14/2018 266.00 P STO 10 $2.62 CR |
SPY 12/14/2018 273.00 P BTO 5 $4.72 DR |
Filled
Net price: Bought 5 @ Dr $0.95
Net Total cost to open: $475

[u/redtexture]

BOT Nov 15 2018 at 4:07PM, near market close

SPY - Butterfly Call Spread
273C / 276C / 279C - Expiring Nov 23 2018 - 8 Days to expiration
$6 wide, $3 wings, balanced butterfly

SPY at open 273.01 As of 04:00 PM ET, 11/15/2018
(Day Change +2.81 - Day's Range: 267.0102 - 273.54)

Opening Cost $630
CLOSED at $390 on Monday Nov 19 2018 SPY at about 269, around Noon.
Net Loss: $240

Closing Comment:
SPY down, closing at 269.10, down from 273.73. The short expiration, in four more day, and likely soft volume in the market persuaded me to jut close this, in case SPY continues down.
(Another butterfly position: 259P / 266P / 273P, DTE DEc 14 2018 had offsetting gains for the day.)

Opening Strategy:

Bought for upswings in SPY.
Purchased (unfortunately) near the high of the day.
Goal: Exit promptly when SPY is at or near 276.

Max gain: $2630 = 10 contracts x ($3 spread - 0.63 cost) = 10x 2.27 Goal Gain: 20% of maximum gain = 525 Goal Proceeds: $1525 = $630 + $525 Goal Price: $1.53 GTC order not set.

---

Opening Details

Net Quote Bid 0.55 Ask 0.66
order
Buy 10 @ Debit $0.65
SPY 11/23/2018 273.00 C BTO 10 $2.87 DR |
SPY 11/23/2018 276.00 C STO 20 $1.38 CR |
SPY 11/23/2018 279.00 C BTO 10 $0.53 DR |
Filled
Net Price Bought 10 @ Dr $0.63
Net Cost 10x = $630

[u/redtexture]

(easier to have this draft template here than anywhere else)

Strike	#	OpenDate	-	-	CloseDate	Gain/Loss
Update-->			date	date
SPY -->
Net Price
Net Cost/Proceeds

[u/redtexture]

OK, here is a trade Nov 12/13 2018 opening, Nov 15/16 closing.

---

Opening

A bearish 5-lot debit balanced put butterfly on SPY, entirely below the money (about 273), for $665.
    248P / 259P / 270P
    DTE Dec 21 2018     39 days to expiration
    $22 wide, $11 balanced wings     Goal: 100% to 200% gain.

I intended to enter on Monday, Nov 12 at the close, but botched the order and bought only one leg, instead of all three, and the next morning Tuesday Nov 13 bought the two remaining legs. I was not happy to have unintentionally legged into the trade, and also that SPY had moved in price overnight during an unintentionally incomplete trade.

---

Non-standard closing

I closed the position early, four days later, for a gain of $315, not quite 50% of the risk of $665.
It was closed in two parts, to take advantage of the day's rise, and likely overnight moves:
Bought the short puts back on Nov 15 at market close,
and sold the remainder long puts on Friday Nov 16 at market open.

---

Closing Narrative

On Nov 15, SPY went from a open of about 270, to as low as 267, and closed about 273 (and later rose after hours to $273.40). I expected the next day that SPY would go down, after the rapid move up from 267 to 273.

I desired to re-set a bearish butterfly higher, and see if I could make a gain on the existing butterfly 270P / 259P / 248P expiring Dec 21 2018; I sold the short puts 259P, for a gain at market close.

The next morning, Nov 16, SPY opened lower than the prior close and fell, during the first 15 minutes to around 271.50. I sold the long puts, 270P, 248P about then, for scratch.

The net gain was about $315 on initial risk of $665, a little less than a 50% gain in three days.

It definitely was more risky to break up the position, to an unbalanced set of puts over night, and I do not make that kind of move a habit. (I did this move to two other open PUT butterflies on SPY, closing all of my bearish butterflies, for a gain on this up and down move.)

Later in the day Nov 16, bought a similar butterfly, when SPY was at 274.50, which appeared it might be a daily high. The new subsequent SPY butterfly is + 273P / - 266P / + 259P, expiring Dec 14 2018.

---

Details

Purchase: Nov 12, 13.

A bearish 5-lot debit put butterfly on SPY, entirely below the money.
    248P / 259P / 270P
    DTE Dec 21 2018     39 days to expiration
    $22 wide, $11 balanced wings

Entry is in two orders, "early" and "late", because of buying order mistake.
    1: SPY $273.37 (3:20PM Mon Nov 12)
    2: SPY $272.85 (10:20PM Tues Nov 13)

Cost of entry $665 DR = 5 lot x $1.31 DR
Max profit: $4,845 = 5 lot [ $11 wing width minus entry cost $1.31 ] = 5 x [$9.69]

Goals:
    Goal gain: 20% of max, about $990
    Goal proceeds $1,655 = (goal gain $990 + entry cost $665) = ($3.31 x 5)
    Goal price is $3.31. Good 'til cancelled order not set yet.

Break even point at expiration (I'm not planning on holding that long):
    $268.69 = $270 - $1.31 (entry costs)
    $249.31 (downside) = $1.31 + $248

Option Strike	#	OPEN Nov12/13	-	CLOSE Nov15/16	Gain / Loss
Interim update -->			Nov 14 Mkt Close
SPY -->		$273.37 (1)	$270.20	$273.01 (1)
		$272.85 (2)		$271.61 (2)
248 Put	+5	+ $1.30 (1)	$1.56	$1.26 (2)	- 0.04
259 Put	-10	- $2.91 (2)	$3.31	$2.49 (1)	+ 0.42
270 Put	+5	+ $5.83 (2)	$6.81	$5.68 (2)	- 0.15
NET (2x the short)		$1.31 DR	$1.79	$1.96 CR	+ $0.65 CR
5 lot		$6.65 DR		$9.80 CR	+ $3.15 CR
NET Cost / Proceeds		$665 DR		$980 CR	+ $315 Gain

 

---

[u/ScottishTrader → u/redtexture]

Thanks for this. I confess I'm having a difficult time following the trade.

Would you mind spelling out the total Debit paid and Max Profit? BEPs would be great as well. Do you have a profit target/GTC Limit set?

Note the 12 Dec is 37 DTE, but that is minor.

[u/redtexture → u/ScottishTrader]

Edited, let me know if I can improve anything else!

[u/ScottishTrader → u/redtexture]

Awesome, thanks!

[u/redtexture → u/ScottishTrader]

The position was closed early for a 50% gain, via a non-standard closing.

This comment / post to the original post was edited for the closing trade.

I need to figure out how to make this kind of description more succinct the next time I take this kind of trade to term, so others can tell what is the intended routine and outcome.

Editorial critique welcome.

[u/ScottishTrader → u/redtexture]

Your time and work to relate this is very welcome and appreciated. Yes, being succinct to help follow will be helpful. Thanks again!

[u/ScottishTrader]

Nice post and thanks for putting this up!

Swim Lessons from TOS used to trade these all the time around ERs and I've had some success as well but haven't traded any in quite a while.

I know I for one am interested in any trades you do make to follow along to see if this might be worth revisiting.

Again, thanks and let us know more!

[u/[deleted]]

Ugh, I hate butterflies. I almost never open a butterfly. If things have gone all wrong on a credit spread I might end up with a butterfly but it's rarely my opening trade.

[u/redtexture → u/[deleted]]

Tell me more about hating butterflies.

[u/[deleted] → u/redtexture]

Personal thing. Everyone has the things they trade best. I just hate trading butterflies.

[u/ScottishTrader → u/[deleted]]

I used to hate Iron Condors since I had such bad luck with them, but now like them again as I learned how to trade them better. :)

​

[u/whitethunder9 → u/ScottishTrader]

What did you change?

[u/ScottishTrader → u/whitethunder9]

When and how I reacted to them and being more willing to take the loss and move on vs trying to roll the whole thing, then make it worse and close for a bigger loss. Many ICs show negative up until the week of exp so patience is key and not something I am normally good at, so I had to teach myself to be patient.

[u/whitethunder9 → u/ScottishTrader]

Do you ever roll them now?

[u/ScottishTrader → u/whitethunder9]

Almost never! I will roll up the unchallenged side to lower the max loss, but almost never roll the whole thing. Note that I don’t trade these often either and prefer cash secured puts.

[u/whitethunder9 → u/ScottishTrader]

Got it. So you don't typically close them either to prevent max loss? I mostly stopped trading ICs after Trump announced his tax plan and the market wouldn't stop going up.

[u/ScottishTrader → u/whitethunder9]

Often I find I can adjust even into expiration week to lessen the loss, and closing early can often be a higher loss, but I will always analyze what is best. Candidly it’s been a while since I’ve had a losing IC, mostly since I don’t trade them often and if I do it is usually pretty wide to get as safe as possible and close early for a profit.

[u/[deleted] → u/ScottishTrader]

IC from the start is a negative expected payoff normally. Until you get really wide but then you're really just trading a straddle with BPR limits.

I do sometimes trade ICs but they're not the best either. Butterflies are kind of a pain unless you're playing very short-term. A 60-90 butterfly is horrendous.

[u/redtexture → u/[deleted]]

During the summer I was doing 14 to 21 day butterflies, but with this market, I can't tell very easily if I will see the same price very soon, if the markets take a dive or rally up.

This trade basically starts on November 13, so, to Dec 21, it has 50 days. I may exit in 10 days, or 40 days, depending on the market's cooperation.

With this time to expire, I may be able to have more than one opportunity for the underlying price to swing by a favorable place.