Most of the live Income Trades (delta neutral, positive theta, selling strategies) that students in our community and myself had on today did much better than expected, and in some cases did great. Lets discuss at least 2 of the trades I had on as examples.
Trade #1 did absolutely great today, and it was a basic non-Directional trade that made 20% today with the market going drastically against us.
Balanced Butterfly Trade
The trade was a balanced Butterfly trade in SPX in the August 19 expiration, and the width of the Butterfly was 40.The trade was put on yesterday when SPX was around 2105.The trade was put on using all Calls.
Here is the trade using a 1 contract example. Buy 1 2065 and sell 2 2105’s and Buy 1 2145. I bought some units at $5.40, $5.30, and $5.20. A unit could be 1-2-1 or 2-4-2 or 3-6-3, whatever size you are trading at.
In this trade, we want the price of SPX to be near the short strike of 2105. Today at around 9:45 am central time, SPX was around $2059 and I got out of my entire trade that I bought around $5.30 and sold it for a $6.40 Credit, a return of about 20%.
How did that happen with SPX moving about 50-60 points from the short strike, which is bad for this trade? Did theta get us the high return in 1 day? No. VIX was up about 3 points at 8:45 am central, this is a short Vega trade, shouldn’t an increase in Implied Volatility hurt an Short Vega at-the- money Butterfly trade?
It should, but this was a bit of an unusual situation. Usually when SPX closes around $2110 which it did yesterday, the VIX would be between 11-15 because if SPX is 30-35 points from its all time high, VIX would be in the lower end of the range.
But yesterday the VIX was around 18 because of the UK vote, sort of an Earnings situation for the market, an Event that could trigger a big Gap move. With VIX up about 3 at 8:45 am central, we still made money from the implied Volatility because the Volatility increases in the individual strikes of our Butterfly worked in our favor.
Just because the VIX went up doesn’t mean we had to lose on a short Vega trade. The key is what happened with the volatility of each of the strikes of the Butterfly combined.
Trade #2 was a heart stopper. It was a 1 Day Iron Butterfly in SPX that I put on Wednesday and took off today for about a scratch, but was thrilled. A scratch means I basically broke even on the trade but covered my commissions.
The Trade was in in SPX and I entered it Wednesday with the Index at $2090. It was a 2 Day trade and I used the June 24 expiration which expires today. I bought the 2100 call and sold 2090 Call.
In the Puts, I bought the 2080 Put and sold the 2090 Put. The Iron Butterfly was put on Wednesday for a credit of $9.40 with SPX at $2090. Today I bought the spread back for a debit of $9.35.
How could I have made any money on this trade since the SPX moved over 50 points away from my sweet spot which is the short strike?
Part of the answer is that when SPX was at $2059 and I bought the spread back, we still had almost 6 hours left of Trading and the market was pricing in the fact that a big rally back was possible.
The other part of the answer is the fact that although the VIX was up, this short Vega trade made money from the Volatility because each of the strikes of the Butterfly didn’t all move up the same.
The takeaway is that Greeks like Vega and Theta are Theoretical numbers and in real life like today, don’t always move like they say they should. The answer is to really understand the Greeks and become a good Option Craftsmen.
Go to Sheridanmentoring.com and check out, fresh off the press, the archives of last weeks 2 day Chicago Seminar we put on.