Jim and I took two different approaches to managing the trade
But what does this have to do with that duck?
Does it work when the market goes up?
Notice how narrow this butterfly is. The probability of profit at expiration is only 12% if you don't make any adjustments. Also notice how much time premium is in this trade. Because you are selling at-the-money options, you collect a huge amount of time premium to play with.
The First Adjustment
Fast forward a few days to Oct 30th.
SPX kept rising and I floated my call side up and the put side down a little more. This was because SPX is now well above the expiration break even and I needed to keep flattening the T+0 line. Here's what the trade looked like at the end of the day on Oct 30th:
I like this trade for several reasons:
- You start with a lot of time premium to play with so you can make a good number of adjustments without ruining your profit potential
- The trade starts market neutral. You let the market tell you which way it wants to go and you react to that.
- If the market goes sideways, you start with good theta so you can make a profit relatively quickly.
- Risk is very low. The T+0 line is FLAT. My 10 lot butterfly was only $2000 in margin to start with. If we had a flash crash, that's the most I could lose.
- Because I'm starting farther out in time, short term movements don't need to be reacted on in the same way with a shorter time frame trade.