SPX Put Broken Wing Butterfly

Loss of mobility and degenerative health loss concept and losing freedom from mobiliy due to injury ormedical disease represented by a monarch butterfly with broken and fading wings on a white background.

Tuesday on SOM TV, I put on a live BWB and am talking about the trade today after big move in SPX yesterday.The trade is in Jan 6 expiration and was done with SPX around 2209. Buy 1 Jan 2200 put  Sell 2 Jan 2170 puts  and Buy 1 Jan 2130 put. The debit was 2.05 and the margin or risk for this 1 unit trade is $1205 dollars, which is the risk on the downside. The risk on the upside is about $205 .I started the trade 1.75 deltas short on this $1200 trade.  During SOM TV Tuesday, I mentioned if SPX hit 2223 yesterday, I would look at the trade and probably sell a put credit spread to narrow the upside of the Broken Wing Butterfly. The original Butterfly width was 30 on the upside and 40 on the downside. By adjusting with a put credit spread, selling the 2190-2200 put credit spread in January, we would be decreasing the upside width to 20 and reducing the short delta exposure on the upside. If you didn’t do anything to the trade, the price is now around $1.35 with SPX at 2243 as of 10:09 am central today Dec 8. If somebody did nothing, they would be down $70 right now divided by $1205 of capital or about 5 1/2% today after huge move yesterday. Not bad but the key is risk management. If someone dealt with this yesterday at 2223 which I mentioned as adjustment point, you’d be singing  in the rain like Fred Astaire. Key point: when you adjust is more important than actual adjustment. 

Thanks,

Dan Sheridan  dan@sheridanmentoring.com

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