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Ratio Spreads: Part IV. Broken Wing Butterfly

The first three posts in this series on ratio spreads (Part I, Part II, Part III) were published recently.

The broken wing butterfly spread (BWB) is a frequently used strategy for more experienced players.  Today I'll introduce that option strategy to readers of Options for Rookies.

In general, any butterfly spread is used when the trader wants to forecast a specific price range for any underlying.  It's also created as an adjustment for existing positions (as a risk management play to limit losses or lock in profits).

In the scenario under discussion (ratio spreads) the BWB is constructed to limit losses, always a good idea when trading options.  Buying options that are relatively far OTM is not done to 'take a shot' at a gigantic market move.  Instead the trade is made to convert a position that is already short naked calls or puts (a ratio spread) into a position that is no longer short any options.  In fact, You can always buy an extra contract or two to provide an unlikely, but nice profit when the market makes an unexpected large move.  If this concept is not obvious, that's not a problem.  Use your broker's graphic software to examine the risk picture. Do not forget to look ahead and examine risk one day prior to expiration.

The BWB differs from a traditional butterfly spread as follows:

Butterfly spread: A trading strategy consisting of the sale of two options, along with the purchase of one option with a higher strike price, and one option with a lower strike price. Necessary conditions:  All options are of the same type (calls or puts); the options owned are equidistant from the options sold, all options expire on the same date

Broken wing butterfly (BWB): Same as above, except that the options bought must NOT be equidistant from the options sold.

Although these positions frequently stand on their own, they can be traded by conservative investors who would like to trade ratio spreads, but who refuse to own positions with any naked short options.  The BWB comes to their rescue.

 

The ratio spread

Let's say you are bearish on the market and want to make a trade that suits your expectations.  Your guess is that the market will fall, but not too far.  With RUT (Russell 2000 Index) trading near 673, you decide to Buy 3 RUT Jan 650 puts (@ $8.20) and Sell 6 RUT Jan 630 puts (@ $5.70).  This is a 1 x 2 put ratio spread, and you collected a credit of $3.20 for each spread. [Most rookie traders think of this as collecting $960.  However, that makes the conversation awkward.  It's far easier to refer to this spread – as well as any other – in terms of its lowest common denominator. That's 1 x 2 in this example]

As discussed in talking about break-even points for ratio spreads, when the market moves too far, you may lose a significant sum.  I know that you (the person making this trade) really believe the market can move through 650 – that's why you bought the 650 puts.  You also believe it will not decline beyond 630 – and that's why you sold the 630 puts.

However, if your are correct about direction, but very wrong about magnitude, there is no reason to lose a lot of money.  This trade is naked short 3 puts, and that leaves you exposed to a gigantic loss if and when there is a big market collapse.  Why take that risk when it's unnecessary? 

If you take the more conservative approach, you can buy some Jan puts and accomplish two things

  • Limit losses
  • Allow you to maintain a cash credit for the whole trade
    • Allows you to earn a profit, even when wrong – and the market does not decline

You can buy RUT Jan 590 puts @ $3.  Or you may choose to save a bit more cash and take a bit more downside risk by buying a put with a lower strike price.

Such a trade turns your ratio spread into a broken wing butterfly spread.  You would own 'a 3-lot' of the BWB:

Long  3  RUT Jan 580 puts
Short 6  RUT Jan 630 puts
Long  3  RUT Jan 650 puts

Maximum loss occurs when RUT is below 580 at expiration, and that loss is $3,000 [per BWB] minus the credit collected when opening the position.

Why $3,000? [$9,000 total].  With RUT settling below 580:

The 650/630 put spread – and you own that one – will be worth its maximum, or $2,000.

The 580/630 put spread, which you are short – will be worth $5,000

 

There are two main ways to earn a good profit from this spread:

a) Expiration arrives and RUT is well under 650 but above 630.  This is the risky way to play because the Jan 630s would have a good deal of negative gamma (and lots of positive time decay) as expiration day draws near.  I don't recommend holding to the end, because this is the highest risk and highest reward play – and many traders are tempted to hold and hope.  I much prefer the next method (less reward and substantially less risk).

b) Hold the position long enough that theta works its magic and erodes the price of the options.  You hope to see the market undergo a slow decline, increasing the value of the Jan 650 puts that you own, but not far enough to offset the time decay in the Jan 630 puts.

Under those conditions, you exit the trade, collecting more cash.  The profit potential is very dependent on how much time has passed, the current price of RUT, and the implied volatility of the options.  In other words, to estimate a profit, you must use an options calculator. 

One good method for establishing a rough idea of when to exit the BWB is to make a trade plan just before or after making the initial trade.  That plan sets your (flexible) profit goals, as well as the maximum loss you araae willing to accept.  Those targets make the exit decision easier – especially for the less experienced trader who may be encountering specific situations for the first time.

When the broken wing butterfly works well, deciding when to exit requires discipline.  It's always going to be tempting to wait 'just one more day' to collect that time decay.  However, the risk of a big move exists as long as you hold the trade. 

One major warning: don't ignore risk. If RUT approaches 630 far too early for your comfort, then risk of loss mounts (in fact your trade is probably already under water).  Sure, losses are limited, but that is no reason to own a risky position.  The thought process is similar to trading any limited-loss strategy, such as the iron condor.  Prudent investors take losses – by exiting, or adjusting, the trade – to prevent the occurrence of large losses.

 

The BWB is a stand-alone trade that gives the trader protection against unlimited losses while providing a very good profit when that trader is correct in his/her market forecast.  This forecast involves more than direction.  In other words, it's not the best choice when very bullish or very bearish.

This post provides the general idea of what a broken wing butterfly is and how it can be used to minimize risk whenthe trader owns a ratio spread.

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Options Trading: Sell the Meat and Buy the Wings

Mark,


I heard about a saying in the options world 'sell the meat, buy the
wings', which I believe to be short CTM options and long 1 1/2 as many options that are many strikes further away but in same expiration
month.

I ran different positions on the risk graph to reflect what it
might look like and found the Greeks to be similar to that of an Iron condor, but
with a better pay off and possibility of performing well in a big move
event.


Would you be so kind as to respond in a blog post or a reply as to the
pitfalls of this positions and how best to manage?

Joe

***

Hello Joe,

Your interpretation of 'sell the meat; buy the wings' is not the one commonly used.  It's a flexible term and describes any butterfly, iron condor or credit spread.

The options bought may be several strikes removed, and you certainly may buy extras, but neither is necessary.


Any option whose strike price is farther OTM, even when it's the next nearest strike, is sufficient.


Joe, there is one portion of your comment/question that is crucial to this discussion, and I want to be certain that you understand the situation.

Any time you own extra options, the 'payoff' is going to look better on the risk graphs. Thus, be certain you get all the relevant information from those graphs. Sure the payoff is better today and tomorrow.  Joe: Have you considered how this position looks as time passes?  

Let's look at a position that fits your description.  For simplicity, let's examine just one side of the iron condor, or a simple credit spread.

Example. 

INDX is trading @860; Expiration is 7 weeks from today.

Sell 10 INDX 890 calls

Compare:

Buy 10 INDX 900 calls (figure 1, BLUE)

vs. Buy 15 INDX 940 calls (figure 1, RED)

 

One.1

figure 1


The thin lines show the profit and loss picture as of today, and the solid lines represent the value of the position when expiration arrives.  It is true that the back spread does better than selling the call spread if there is an immediate rally to 980.  But have you considered how this trade looks as time passes?


Here's the graph, just three weeks later.

 

One.2
figure 2

That thin red line's not looking so good anymore.  Again, this is a personal view, and from my perspective I would never open this type of trade.  A rally hurts, the passage of even a small amount of time hurts, an IV decrease hurts – and that's extremely likely if you get the desired rally.

Joe, I suppose you could say that the red line shows a 'better' risk graph becasue there's the chance for a big profit if the index moves higher by 200 points (23%) or more – in the next seven weeks.

But, from my perspective, this risk graph is far worse and the trade is far more risky.  The solid line represents the profit/loss at expiration.  The potential loss of $50k would talk me out of this trade.  Let me ask: What is it that you like about this?  Or did I pick a poor example?

To most of the options world, 'sell the meat and buy the wings' means to sell the more expensive options and buy the less expensive options.  Yes, you can buy extra options, but there is no need to make them so far OTM.

758


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Butterfly spread. Follow-up question

Mark,

Since your personal preference is to be a premium seller, I think I can guess
what your answer will be…but I'd like to hear it anyway.

You mention above that there is a "VERY low probability of collecting
anything resembling the maximum reward" on a butterfly. That makes sense, but
would you say that the probability of good returns is low enough on the
sell-side to make "buying" butterflies a decent play (at least relative to paying a debit for ICs, with which I would not be comfortable)?

My question is: Assuming the trader could guess with a decent rate of success
when periods of higher actual volatility would occur – I realize that's a big if
– is the deck fundamentally stacked against the "buyer" of a butterfly? In the
strategy I'm imagining, the trader would need to 1) identify when a period of
strong underlying movement was about to begin 2) determine when the period of
movement was exhausted (not holding until expiration…so when to take full or
partial profits) and 3) decide when to pull the plug if the underlying looks
like it's going to settle in the zone of maximum pain.


What other factors am I missing? The strategy would also benefit from a
rising IV environment, correct? And just to reassure you, this all purely
speculative and academic at this point…I don't have money on the line.

Thanks,

Marty

***

Yes, buying butterflys is a decent play. If you pay 50 cents and are willing
to sell at a bit over $1.00 – then it's a decent play. If planning to hold
through expiration, then it's not so good (my opinion).

The problem is that expiration week arrives, and you can only get about $1.50
for your near-ATM fly. You want to hold out for much more – perhaps $7 (10-point
fly).

That's the problem. With so little time remaining, investors hold and the fly
often becomes worthless.

That does not appear to be your plan. So yes, low cost butterfly spreads are
ok.

Rising IV – yes it helps, but barely. The closer to the money spread (the one you own)
would increase by a little more than the farther OTM spread (the one you sold),
for a small net gain.

Theta is more important than vega in this trade.

I don't think you are missing much. The butterfly is a bet on market
direction (if you buy OTM) or stability (if you buy ATM – but these always cost
more).

I don't trade these, but my advice is to not be greedy. These are trading
vehicles more than investments.

One more point.  A butterfly doesn't have a point of max pain.  Almost the entire universe of possible prices for the underlying results in max pain for the butterfly.  There is only a small profit zone.

499


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Butterfly and Condor Spreads

I received a question recently about butterfly spreads.  I never write about them, despite the fact that many individual investors like to trade such spreads.

Butterfly

Definition:  An option strategy combining a bull and bear spread such that these two spreads share a common strike price.  Frequently referred to as a 'fly.'

Example:  The options in a butterfly are either all calls or all puts.

Buy AAPL Nov 100/110/120 call butterfly:

Buy 1 APPL Nov 100 call

Sell 2 AAPL Nov 110 calls

Buy 1 AAPL Nov 120 call

Note: 

Long the 100/110 call spread; Short the 110/120 call spread

Buy AMZN Dec 105/110/115 put butterfly:

Buy 1 AMZN Dec 115 put

Sell 2 AMZN Dec 110 puts

Buy 1 AMZN Dec 105 put


Similarity to Condor spread:

The butterfly is a condor.  The only difference is that there is a separation between the strike prices of the bull and bear spreads in the condor, and there is no separation (the spreads share one strike price) in the butterfly.

Condor


Condor Example:

Buy 10 SPY Jan 85 calls

Sell 10 SPY Jan 90 calls

Sell 10 SPY Jan 100 calls

Buy 10 Spy Jan 105 calls

In this condor, there is a 10-point separation.

Thus, the butterfly is similar to the condor.  They are both members of the family of spreads called 'winged spreads.'

Iron Condor

The condor is equivalent to the iron condor.  Why?

In the iron condor, instead of buying the bull call spread, the equivalent put spread is sold.  Thus, the iron condor is:

Buy 10 SPY Jan 85 puts

Sell 10 SPY Jan 90 puts

Sell 10 SPY Jan 100 calls

Buy 10 Spy Jan 105 calls


Because selling the Jan 85/90 put spread is equivalent to buying the Jan 85/90 call spread, these two positions are equivalent.

Going one step further, the butterfly is equivalent to an iron condor in which there is zero separation between the strike prices of the bull and bear spread.

Bottom line:  This is just another way of stating that iron condor traders can purchase a condor or butterfly and have a position that behaves similarly.  The chosen strike prices represent the real differences in how the spreads perform in the real world.

498

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Q & A. Iron Condor and Butterfly Spreads


This was originally posted as a comment.  I made minor changes for clarity.

Hi Mark,

I've enjoyed the lightning round and the quizzes. I am
reading about IC and DD and have condensed what I believe you have been teaching
about adjustments and I want to see if these are your thoughts and basic
tenets.

1. Any position that is uncomfortable has too much risk

Not necessarily.  It could have too little reward.  Or no longer suit your trading style – I assume it suited when position was initiated.

2. When
looking at adjustments examine whether or not the new position is one that you
want to be in.

3. Sometimes closing is the best option.

4. IC benefits when
Vega drops after the initial purchase and DD benefit when Vega increases.

Vega is a property of the option and it's value changes as the price of the underlying asset changes,  The term you meant to use in place of 'vega' is 'implied volatility.'

5.
Typically 13 weeks before expiry is a good purchase time and attempting to be
out 2 weeks prior.

No.  This is what makes me comfortable (most of the time).  I never recommended that anyone else adopt this idea.  I talk about it so that others can consider this as one alternative.



My question today revolves around Iron Condors that you want to hold, but one of your inside (sold) legs is being threatened (moving too near its strike).

You mention buying an ATM Put or Call [I recommend buying OTM options – but they should be closer to being in the money than your short option]  as
applicable to minimize risk.

How do you figure how many to buy?  For example if
you have a 1-lot (meaning all 4 legs X1) or a 10-lot, 10 point RUT IC, is
there an equation or some other information in the Greeks that would assist
in providing how many you would buy as protection?

The Greeks, coupled with the P/L graphs provided by your broker should be all the information required.

How many to buy?  I do not use rules.  You could arbitrarily decide to cut delta by X %.  Or decrease negative gamma by X  %.  If you are adjusting late (short is almost ATM), then X is a higher number than if you begin adjusting in stages

I think cutting delta and gamma by 20% is enough – when the adjustment is made early (early is a flexible term and depends on how YOU look at the position).  If you don't adjust until the short option is already ATM, that's 'late' in my opinion and 20% is not going to be good enough.

One other aspect of 'how many' depends on which strike you choose.  If short 10 of the 800 calls and decide to buy calls, I might buy one 770, but would want at least 2 of the 790s – again assuming this is a stage I (early; not in trouble yet) adjustment.

You can also buy insurance when it's not needed (I do that frequently).  I buy put protection on rallies and call protection on dips.  Then I am not pressured (as much) when the market moves against my position.  Because there is little urgency, if I were holding a 10-lot IC, buying 1-lot would be good enough.  Then I'd buy another, if available, at a better price later.

How much to spend on these adjustments is usually a consideration.  I don't dwell on the credit collected from the original iron condor.  I buy portfolio protection when the price is right and see some portfolio risk.  Again, no rules.  No guidance I can offer – other than to post my trades and discuss as time passes.  But right now, I don't want to do that.

Also, I read on another web site about IC's that are traded for a  $1.00 premium.   But even at a 90% win rate, if you don't
adjust or exit, or consider your max potential loss, one month could wipe out
the year's profits.  Why would they settle for such a low premium -or is this personal
preference?

You know that everyone looks at investing/trading from an individual perspective.  The $1.00 IC trader may be very happy with a 90+% win rate.  We don't know if he/she ever adjusts, or whether he closes his eyes and hopes for the best.  My point is: just because he collects only $1.00, it does not mean he is careless with risk management. But it's very likely that he doesn't cover early and holds to expiration in an attempt to collect each penny.  Not the risk I take, but that does not make it 'wrong' or a poor investment style.

Lastly, what are your thoughts on using a butterfly to extend your break-even
in the event one of your legs is threatened? For example you have a 550/560 Put
spread and see movement towards the short 560 strike.  You could take that out with a
540/550/560 butterfly and push that leg out-just wondering if this is an
adjustment that you consider?

Butterflys also seem to have a high reward to risk, do you ever use these as
a part of a short month IC, for instance looking at November?

Like to hear your thoughts.

I do occasionally buy a butterfly to move my short options from one strike to another.  But not often.  It really does depend on two major factors: 

a) How much does the fly cost and are you willing to pay that much for a TINY (TINY TINY) bit of protection.  Remember that 10 points is essentially nothing in a $600 index.  To me, the butterfly is often just too expensive.  I'd pay $0.25, but not $1.00.  You may be willing to pay more.

b) Does this adjustment move you from uncomfortable to comfortable?  I don't think that's possible.  It's just 10 points.  If you were to buy a condor (see tomorrow's post) instead of a butterfly, you could move the short strike more than 10 points – and that could easily be worthwhile – at the right price.

You obviously just discovered butterfly spreads.  I get that you want to learn more about them.  But, as with any new toy, you cannot expect to jump right in and use it with maximum efficiency.

By coincidence, I already prepared the blog post for tomorrow and it's about butterflies and condors.

I do not trade butterflys as part of a front month plan.  What I used to do, when I needed FOTM protection, is bid 15 or 20 cents for a FOTM  butterfly – but only if I needed protection.  Example, with RUT near 570, if my downside looked bad, I would bid 15 cents for the 450/460/470 Jan or Dec fly.  Probably would not get filled.

Yes, good risk/reward.  But VERY low probability of collecting anything resembling the maximum reward.

Thanks,

Don

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Comparing Iron Condor, Ratio Spread and Broken-Wing Butterfly

Erin asked:

Hi Mark,

I was wondering if you had an opinion on ratio spreads and BWBs? Would
something like a 1:2 put ratio + 1:2 call ratio have any advantage over an IC, particularly with regards to adjustments?

Look forward to hearing your thoughts.

I'm guessing that BWB refers to a broken-wing butterfly (if not, I'm stumped).

The positions:

IC:                        + 10 GOOG Jul 380 put
                               – 10 GOOG Jul 390 put

                           -10 GOOG Jul 440 call
                    +10 GOOG Jul 450 call

Ratio:            -20 GOOG Jul 380 put     (IC is long this option)
                     +10 GOOG Jul 390 put    (IC is short this option)

                     +10 GOOG Jul 440 call
                    – 20 GOOG Jul 450 call

BWB               +10 GOOG Jul 440 call
                      -20 GOOG Jul 450 call
                      +10 GOOG Jul 470 call

These positions are very different.  For example when comparing the iron condor with the ratio spreads, they are long and short the opposite options.

For our discussion, let's assume by 'time to make an adjustment' you are suggesting that the market has moved higher the short call is threatening to move into the money.  It doesn't matter how far OTM that call currently is, because different investors have different points at which they adjust.

Let's also assume that the short option is 10 points farther OTM than the long option.

The last assumption is that the adjustment of choice is to exit the position.

***

Iron Condor

With an IC, you are short a call spread that can become worth $1,000 (worst case); and you sold it for far less.  Our responsibility as risk manager, is to prevent that (or any similar loss) from happening.

The danger occurs as GOOG approaches 440.  If holding or closing the trade is the only consideration, I recommend establishing a maximum acceptable loss, and if and when that point is reached, exit.  That may when the call spread reaches $4, or $5, or whichever price your comfort zone allows. [Remember that if you bought the IC and collected $3 originally, then paying $5 is not the disaster it would be if you collected only $1.]  Your decision is when to pull the trigger.


Ratio Spread

With a ratio spread, you face a far different situation.  This time you own the 440s and are short twice as many 450s. 

There's the good news:  You own a spread that is ITM and is heading towards the point where it will reach maximum value of $1,000 (if it remains there at expiration).  So that's a better situation than you faced with the iron condor. 

But, you are short two calls instead of only one, and the second is a naked short. Some brokers do not allow customers to carry naked short call positions.  But, if you are allowed to do so, it's considered to be a risky trade and I no longer allow myself to own such positions, but that's not the point of this discussion.

Once GOOG moves past 450, then the naked short option quickly eliminates any profit you had from the 440/450 call spread [Mentally breaking this trade into two parts: the call spread and the naked short].  In fact, if there is much time remaining before the options expire, the position quickly turns into a  loser, with the loss mounting as the stock rises. 

When there's very little time remaining, the position still has terrible negative gamma, but the limited time prevents the extra 450 call from exploding.  If time runs out (the market closes on expiration Friday), and if GOOG is under 460 (your break-even point if you paid zero cash to establish the position), things are not too bad.  Obviously, a lower price is better.

The major factor in deciding whether to hold or exit is going to be time.  With expiration rapidly approaching, you may still want to exit because you probably have a profit (although it's only risk that should matter, but I know that most traders only want to know if they have a profit or loss, and risk be damned.  This is not good thinking, but it is the way the world turns).

Thus, it's possible to have a good profit as the stock moves towards 450, and that profit possibility makes this trade look 'better' than the iron condor – which has v
irtually no chance of being profitable as GOOG moves towards 440 – a full 10 points lower!

The ratio has a higher profit range, but there is that 'unlimited loss' possibility that makes it more dangerous to own.  In response to your question Erin, I'd rather have the adjustment decision with this position than with the iron condor.

This is just another personal comfort zone decision.  The optimist  understands that the stock is currently at its sweet spot, but danger looms.  The intelligent pessimist sees the danger, and may fold in the name of safety.

These are interesting positions to own, but I have removed them from my arsenal of strategies – just because I do not want to face a margin call (which can happen as the stock rises) or a nightmarish stock market opening gap.

Broken-Wing Butterfly

With a BWB, you are short a 20-point spread, and the maximum loss is $1,000 less the premium collected to open the trade.

This is essentially the same as the ratio spread, but this time you are not naked short any options.  You own the 470 call and there is neither a potential margin call nor an unlimited loss in your future.

I'd treat this spread the same as the ratio spread because it is the ratio spread.

Erin,

I hope that helps.  The iron condor is really the odd man out.  The other spreads are similar to each other and the IC trades very differently. 

IMHO, the ratio (better yet the BWB) is easier to adjust because time is THE consideration.  [ADDENDUM: But the risk of owning such a position is so great, that I never recommend this position to anyone.]

Iron condors are risky at all times (if the short strike is approached) – but the risk is limited.

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Unintentional Butterfly Spreads

Butterflies are a very popular option trading strategy among  individual investors.  I seldom trade butterflies, but because of my style, I often find that I own flys (a convenient abbreviation).  The question arises: How can I take advantage of owning those unintentional butterflys, or should I pretend they are not part of my account?

A butterfly is a spread with three legs.  All three are calls, or all three are puts, and each expires at the same time.  A call butterfly combines the purchase of a bull spread with the sale of a bear spread of equal width [If the bull spread is 5-points wide, then so is the bear spread], with the proviso that the option sold in each spread is identical.

The ratio for a butterfly is: long one; short two; long one.

Here's a butterfly spread that I held last week:

Long  12 RUT Jun 540 calls
Short 24 RUT Jun 550 calls
Long  12 RUT Jun 560 calls

Note this position is

Long  12 RUT Jun 540/550 call spreads
Short 12 RUT Jun 550/560 call spreads

There are other types of butterfly spreads, including iron butterflies and broken-wing butterflies.  Perhaps that's a good topic for another post.

Unintentional?  How can I own an unintentional position?

I trade iron condors most of the time.  Last week I was still holding onto some June positions, against my better judgment. [But this time I got lucky and earned a good profit.  More often than not, I find holding these risky positions results in further losses.]

I had two June call spreads remaining, having recently covered the put spread portion of the iron condors at low prices.  I was short the Jun 530/540 call spread and the Jun 550/560 call spread.  Here is a list of my positions (but not using the correct quantities):

Short 20 RUT Jun 530 calls
Long  26 RUT Jun 540 calls  (I owned six extra calls)
Short 25 RUT Jun 550 calls
Long  25 RUT Jun 560 calls

Embedded in those two call spreads are two butterflys. 

I was long 12 RUT Jun 540/550/560 call butterflys (12x24x12)

I was also short 12 RUT Jun 530/540/550 butterflys.

I refer to these positions as unintentional butterflies because I did not originate the positions as flies, but as individual call spreads.  Nevertheless, those butterflies were in my portfolio.

If RUT were to rally to 550, the butterfly spread would be a winner.  But that's not the way to evaluate risk because the 530/540 spread would lose the maximum possible amount, and my six extra calls would only help (up to 550) on a continued rally.

Above 550, I'd be facing immediate danger from the 550/560 spread.  Six extra longs don't go very far when protecting a short position of 25 spreads.

NOTE:  Looking at values when expiration arrives, at 550, the six extra calls would be worth $1,000 apiece.  Because I was short 25 Jun 550 calls (and still long six 540s), for each point above 550, I'd lose $1,900 – up to a maximum of $19,000.  After 560 the losses stop and my six extra calls would produce $600 per point.  But this is a very risky position when RUT is trading that high.  the position was bad enough at 530, but I did not want to face that trouble if we rallied far above 550.

Thus, I sold my call butterfly spreads.  My rationale was that it reduced risk if we rapidly rose above 550 (yes, I understand if that happened I could sell the fly at a better price as the index approached 550), and would provide extra profits if RUT ended its rally and headed lower.  The point of this story is that I had a butterfly embedded in my position and made a trade it when I thought the price was good enough ($1.30). 

The position looked strange after the trade, but was still easy to manage.  As it turned out this time, the market receded and the June positions were readily closed.

Position after butterfly sale:

Short 20 RUT Jun 530 calls
Long  14 RUT Jun 540 calls
Short   1 RUT Jun 550 call
Long  13 RUT Jun 560 calls

When you own flies, the best result occurs when expiration arrives and the underlying asset is very near the middle strike.  Then the bull spread (you bought) is worth near its maximum value and the put spread (you sold) is worthless (or worth very little).

Thus, holding has benefits.  The spread can continue to increase in value.

But, holding is risky because if the market moves and the three options are out of the money (or in the money) at expiration, then the fly is worthless.  Thus, it's best to sell a fly at some point.  But choosing that point is a difficult proposition.  I'm sure some fly traders have their individual guidelines, but I was pleased to collect that $1.30 with a week and a half remaining before the options expired – and especially when all the options were OTM at the time I sold the fly.

If you have
more than one iron condor position for any given expiration month,
take a look the possibility (don't jump in without a good understanding of how to handle the residual position) of trading those embedded flys for additional
profit opportunities.

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