Traders Ask: Is it better to neutralize a double butterfly or simply close it?

Seth FreudbergGeneral Comments, Options Education, Seth Freudberg's Blogs, Traders Ask, Trading Lesson1 Comment

Martin asks:

I have a question about one of your first webinars  involving  the February butterfly. At  the end of the trade it appears that   instead of closing the trade completely you just neutralized  it. What was the reason that you handled it that way ? What is the advantage of  neutralizing the trade  instead of closing it?:

Martin is asking about a trade in which there were two butterfly spreads open at the same time. The two spreads created two large zones of profitability such that if the market price of the SPX index stayed in  a  certain price range within those zones, the trade could be exited at a profit. The trade had hit a profit level that in my judgement was about as good as it was going to get, so at that point I had decided to exit the trade and take my profits.

I had a choice–I could have attempted to exit the trade by simply selling both butterflies. That would have worked theoretically, but in reality, as the market is always in motion, the likelihood is that one of my sell orders would have been triggered as the market moved towards the center of one of the butterflies and I would have ended up chasing the price downward to sell my other butterfly. This is not always the case, but having been burned during  this process more than once, I have decided that I am not going to expose myself to that problem.

The technique we’ve developed to close double butterflies involves buying a condor with the long strikes cancelling the short strikes of the two butterflies. When done in the right proportion, this has the effect of completely neutralizing the trade so that  no market movement in any direction  changes the P and L of the trade through to expiration. The benefit of handling the exit this way is that  it effectively   closes both butterflies in one transaction and therefore eliminates the execution risk of trying to close both butterflies simultaneously. I have found that I consistently get good results when handling the exit  of a double butterfly this way.

Thanks for your question, Martin. I hope that this helps to improve your trading results!

There are only 4 days left until the launch of SMB’s Options Training Program and the Options Tribe.   In our first “tribe” meeting we’ll be interviewing one of the finest buttefly traders I have ever known. I’m sure that  you’ll find it both  interesting and informative.  This link will take you to the registration form for the free webinar on Monday: Hope to see you there!

Seth Freudberg

Director, SMB Options Training Program

One Comment on “Traders Ask: Is it better to neutralize a double butterfly or simply close it?”

  1. When adding the condor purchase do you then hold all of the positions into expiration and let the cancelling effects take place?  Thanks.

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