This post is another in a series that we will be publishing which track the hypothetical performance of broken wing butterfly trades selected by Greg Loehr of Optionsbuzz.com.
For those that are watching this hypothetical SPX broken wing butterfly, you saw that even yesterday’s big sell off wasn’t enough to bring the trade even close to a loss exit. The biggest loss that I saw the trade hit was about 15-20 cents. No where near a loss exit. Today the trade stands at a 20-cent profit. Using the options that expire tomorrow, this butterfly is made up with the following put strikes: 1385-1380-1370. I identified this trade last week and have been tracking its P/L based on the entry credit of $0.35.
But now, without about 1.5 days to go, this is where many of the nuances of this kind of trade come into play including these two: theta, and the change in theta. Most options traders understand the greeks, and if you don’t, you need to learn. And then you need to learn the ‘greeks’ of your greeks.
One example of that is that theta has a theta. That is, theta changes over time – increasing as expiration nears. Delta also changes over time. With the passage of time ITM option deltas move toward 100 and OTM option deltas move toward zero. When do these ‘secondary’ greeks really come in to play? As we approach expiration.
The break even of this butterfly currently stands just about one standard deviation out of the money. If you’re only somewhat familiar with broken wings, then you might say this is where it gets dicey. If you’re very familiar, then I think you’d say this is where it can get very interesting. This is where you take the risk graph and chuck it because it’s not going to help you figure out how to manage this trade.
Being able to accurately read up/down the option chain to analyze price fluctuation while constantly reassessing the changing greeks can give you more insight as to when this trade should be held in order to maximize potential profits, or when to bail because the conditions are just not there. With each passing minute this trade gets better and better do to the theta (and the fact that it’s continually increasing); but it’s also close to the edge of having the index price too close for comfort.
I’ll update this trade again later today or tomorrow. If you’d like to learn more about broken wing butterflies, including an hour of coaching where we can discuss the application of this strategy to the weekly options as I have been doing in this forum, click on the banner below.
Trade safe!
Greg Loehr
Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commisions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.
No relevant positions.
