New Trade I'm starting to build a new SPX broken wing butterfly trade. I've been waiting for a down move but the market seems to want to keep going higher. I decided to put a partial position on today. I started with a short put at 1910, then added the put debit spread hedge (1935/1910) and then added a two lot of the butterfly. That left me with one net naked short put which I'll take a look at tomorrow as I did all of this in the last 30-minutes of trading today. Here's where I am: Volatility Charts SPX Three Month Daily Chart OptionVue Matrix OptionVue Analyze Chart Greeks Calculations Interactive Brokers Trade Log NOTE: I initially used the 1945 strike for my long puts but decided to use the 1935's instead so I rolled them down.

I'm thinking I'll keep the BWB on SPX and do a different trade in ES. Maybe something with more positive vega or short delta.

Trade Update The market had another volatile day with a 22-1/2 point intraday range but only losing $0.08 at the close. What a roller coaster. VIX was up $0.73 to $13.15 at the close but was as high as $14.94. With the bump in volatility, I added two more lots of broken wing butterflies to the position today and bought the extra long put so I'm not short any naked puts now. Greeks calculator is solid green and the T+0 line looks pretty flat. Just slightly positive delta. I'm down $140 on the trade mostly due to volatility rising from when I put the first tranche on. Here's how it looks now: SPX Intraday Chart Volatility Chart OptionVue Matrix OptionVue Analyze Chart Greeks Calculations Interactive Brokers Trade Log

Trade Update for Monday SPX 1971.80 +16.70 Sorry about the tardiness. I was busy producing the Market Analysis video and it got a bit late. This is my update from yesterday's close. I added one put credit spread to raise up the call side a bit. It was a $410 credit. I used the same strikes I'm already trading to keep the number of strikes down. The position is profitable now OptionVue Matrix OptionVue Analyze Chart Greeks Calculations Interactive Brokers Trade Log

Trade Update for Tuesday SPX 1981.60 +9.90 SPX was up again. I don't want to fight the bull market so I added a single long call with a 36.9 delta to get some positive delta and some profit potential if the market keeps moving up. The call was selected as the price was less than the upside credit for the broken wing butterfly so there's no loss until SPX drops quite a bit. I will sell the call if it loses 20-25% of it's value so I'm going to risk the entire amount. I just want to give the market a chance to tell me which direction it wants to go. FOMC announcement is Wednesday so I'm curious to see if the market rallies or declines. NOTE: The Greeks Calculator shows some warnings, but that's ok as it's all due to the extra long call. SPX 3-Month Daily Chart OptionVue Matrix OptionVue Analyze Chart Greeks Calculations Interactive Brokers Trade Log

Trade Update for Wednesday SPX 1986.43 +4.83 0.24% FOMC day today. Many times the market initially reacts one direction then reverses. That's what happened today. The initial reaction was negative but quickly recovered as you can see on the intraday chart. The 2000 call I bought at 7.80 yesterday closed at 9.20 today so has made an additional $140. The risk chart looks good if we keep moving higher. I'm keeping an eye on the 2005 and 2010 calls to possibly sell one if they get closer to the price I bought the 2000 for. Very little risk on the downside at the moment, but the market can turn on a dime so I'll be watching. SPX Intraday Chart (2-minute bars) Volatility Chart OptionVue Matrix OptionVue Analyze Chart Greeks Calculations NOTE: This is not a typical income trade where I want to keep the T+0 line flat. I'm intentionally leaning long which is reflected in the orange warnings. If this was a pure income trade, I would definitely not want the T+0 line this curvy.

Trade Update SPX 1992.33 +5.82 0.29% SPX rallied again, getting close to 2000. Jim Riggio said everyone expects SPX to touch 2000. I suspect he's right. Yet I couldn't resist selling a 2005 call for $9.90 today against my 2000 Call I paid $7.80 for just two days earlier. That locks in a $210 profit with another $500 possible if SPX closes above 2005, which is definitely in striking distance. I didn't feel comfortable with leaving just the long call on by itself as I agree with Jim that I think there's a battle brewing at the 2000 level. At this point, the trade is looking fantastic. Video Update http://cdurl.us/p1350 SPX 3-Month Daily Chart Volatility Chart OptionVue Matrix OptionVue Analyze Chart Greeks Calculation NOTE: Now that I'm flatter, the calculator is all in the green Interactive Brokers Trade Log

Trade Update SPX 1988.34 -4.03 -0.20% The market sold off a little bit today on an overall quiet day. I had a feeling we were due for a pull back which was one reason I sold the 2005 call on Thursday. I'll product a trade review video tomorrow as it's Friday night! The position is +$1000 now and the risk chart in a very strong position. OptionVue Matrix OptionVue Analyze Chart Greeks Calculator

I had some questions about your Broken Wing Butterfly. I hope this is the place to ask them. Let’s say I place the butterfly like the following. I’m using prices as of 8/22/2014, SPX is 1988.40: Using SEP options: Buy 4 1960 puts Sell 8 1940 puts Buy 4 1880 puts Net credit is 1.50 That’s the butterfly. Then I add one slightly OTM put debit spread, 25-30 strikes wide, so I add the following: Buy 1 1985 Put Sell 1 1960 Put Net debit is 7.15 So the position as a whole has a net debit of 5.65. If this is correct, anything above 1983.85 is a loss. If, however, I went just a little further OTM with the debit spread, it would look better. Like if we did the following: Buy 1 1970 Put Sell 1 1950 Put Net debit is 3.80 (is this the correct number of contracts to hedge the 8 butterflies?) This gives a profit of $220.00 if SPX closes above 1970 (with a potential return of 10K if closing at the short strikes). I assume you recommend something more like the second debit spread as opposed to the first? If this is correct then the margin required on a PM account is slightly over $13K providing a 1.5% return or 6% per month. Is this similar to what you are doing? Last question: if you put these on every week how do you keep track of them all? Don’t they occasionally all run together when the market isn’t moving quickly? Thank you. Mike

Hi Mike, I first start with a one lot to measure the credit. +1 1960 P -2 1940 P +1 1880 P Net Credit of $1.81 (OptionVue's pricing is a little different than yours it looks like). You then scale it up to 7-9 contract. Let's do an 8 lot +8 1960 P -16 1940 P +8 1880 P $1,448 credit Your put debit spread is +1 1985 P -1 1960 P Net Debit of $739 Total Net Credit combining both is +$709 (less commissions and slippage naturally) Reg-T margin is $28,791. so the max yield on the upside (with no changes) is $709/$28791 = +2.46%. OptionVue says the 1940 Puts are a -16.5 true delta, so I'd probably use the 1950 or 1955 as my short strike for the center of the tent. Remember, to put a GTC order to close that put debit spread around 70-75% of the price you paid for it. In this case, 75% of $739 = $554. If we do that, then our profit on the call side would rise $554 to $1263. Margin would increase $2500 to $31,291 so the yield would be +4.04% without doing anything else. I'd rather get my hedge closer to the money as the delta is higher and it starts helping your position much sooner. It's easy in OptionVue to keep the trades separate. That said, if the market is moving quickly, it's simple to hedge with futures until you can sort out the option trades.

Thanks a lot, Tom, this all makes good sense now. Question: at what point would you add the second put debit spread? And do you put it on at the same strikes as the first?

Hi Mike, Part of that answer is "trader's choice." If the market moves quickly right after you put the position on, you can't wait too long. If more time has passed, you can probably wait longer. At the latest, I would put a 2nd put debit spread on when the underlying gets at or near the top of the tent (the short puts strike). You can use the same strikes, but there's no rules for that. You just have to compare the different possibilities and see which one you like the best at the time. I wouldn't put it too far away from at-the-money however. Maybe even in-the-money if you need more negative deltas.

Thanks again Tom, your explanations are helpful. I just had another question; having just changed my account to a PM rather than Reg-T I noticed that the margin required was nearly identical to yours in your example above. Possibly this is off-topic, but are you able to realize any advantages of using a PM account in trading like this? I guess it just shocked me that margin was practically the same.

Hi Mike, The PM margin can be close to the Reg T margin if the risk is close to the market price. If the risk is far away from the market price, that's when PM kicks in and really lowers the margin. As time passes on these broken wing butterflies, the margin shrinks as the risk gets farther and farther away from the market price.

Trade Update SPX 1988.31 +9.91 0.50% SPX rallied and the VIX closed at 11.70. The position had eeked out everything from the butterfly assuming we stay near the 2000 level. I decided to close the butterfly and leave the call vertical on. I added the short call vertical to create a riskless position with a small change of making a bit more in 19-day if SPX closes in a small 10-point range. Margin is zero now so I can look for other places to put the capital to use. The trade is +$1225 (roughly) with a maximum of about +$1700 if SPX closes exactly at 2005. I have to get up early and I just published the market analysis video but I have to get to bed so I'll update the rest of this post and shoot my trading video in the morning before the market opens. See you then! PS: Here's the current risk chart: