presents the spx weekly iron butterfly - open tradez · 2020. 5. 20. · the iron condor spread bto...

Presents

The SPX Weekly Iron Butterfly

With

Bill Corcoran

I am not a registered broker-dealer or investment adviser. I will mention that I consider certain securitiesor positions to be good candidates for the types of strategies we are discussing or illustrating. Because Iconsider the securities or positions appropriate to the discussion or for illustration purposes does notmean that I am telling you to trade the strategies or securities. Keep in mind that we are not providingyou with recommendations or personalized advice about your trading activities. The information we areproviding is not tailored to any particular individual. Any mention of a particular security is not arecommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for anyspecific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation,regardless of whether we are discussing strategies that are intended to limit risk.

I am not subject to trading restrictions. Myself and other instructors could have a position in a security orinitiate a position in a security at any time.

SELLING OPTIONS

SELLING OPTIONS

• Traders who SELL call and put options to open a position can enjoy HIGHER PROBABILITY trades.

• Time value decay works in the trader’s favor.

• The PROFIT is limited to the PREMIUM RECEIVED (per share).

• The option seller (you) take on a contractual obligation.

THE SELLER’S ADVANTAGE

Stock 102

STO 100 P for $2 credit

Seller receives $2 per share option premium.

Seller is obligated to buy the stock at $100 per share

Market Maker has the right to sell to the stock at $100

THE STOCK GOES SIDEWAYS, YOU WIN!

Stock 102

100 P sold for $2 credit

Expires worthless



Market Maker would not want to force you to buy stock for $100

if he can sell it for $102.

STOCK GOES UP, YOU WIN!

Stock 102


Expires worthless





THE STOCK GOES DOWN SOME, YOU STILL WIN!

Stock 102





Stock 101100 P sold for $2 credit

Expires worthless

THE STOCK GOES DOWN A LOT, YOU LOSE!

Stock 102



Market Maker WILL force you to buy stock for $100

EVEN THOUGH IT IS ONLY WORTH $85

Stock 85


STOCK IS “PUT TO YOU”!

RISK• How many of you like the higher probability of a

profit in selling options?

• Do you see how time value decay works in your favor.

• Who is freaked out by the RISK in selling puts?

• OK, that’s good. It’s even worse if you are selling calls!

SELLING OPTION SPREADS

REDUCING RISK

• It is possible to reduce the potential risk in selling option contracts.

• By buying an option at another strike we can reduce the risk on the short (sold) position.

• Buying and options and selling another option reduces risk while preserving the advantages of selling.

• Remember these are contracts we are buying and selling.

INSURANCE

Stock 102


Seller receives $2 per share option premium, then spends $1 to

buy the next strike price OTM, leaving $1 credit for the seller.


Market Maker is obligated to buy the stock at $95 per share

BTO 95 P for $1 cost$1 net credit

INSURANCE

Stock 102


Seller (you) is obligated to buy the stock for $100

Market Maker is obligated to buy the stock for $95

If the stock is anywhere above $100, both options expire worthless.

You make $2 on the option you sold! ☺☺

You lose $1 on the option you bought!

YOU MADE $1 NET ☺


INSURANCE

Stock 102


Seller (you) is obligated to buy the stock for $100 and the stock

is “put” to you for $100 per share.

Market Maker is obligated to buy the stock for $95 and the stock

is “put” to him for $95 per share. The difference is $5 minus the

$1 credit you brought in, so the risk is reduced to $4


Stock 85

BULL PUT SPREAD

Stock 102


Seller (you) is obligated to buy the stock for $100

Market Maker is obligated to buy the stock for $95

If the stock is anywhere above $100, both options expire worthless.

YOU MADE $1 NET ☺

If the stock is below $100 the options are exercised and assigned,

You lose $4 , but not more


THE SAME, BUT DIFFERENT

• The Bull Put Spread may be used when a trader is mildly bullish to bullish on a stock.

• When a trader is mildly bearish to bearish, a similar strategy can be used by selling call option premium.

• The trade is set up in similar fashion and has a similar risk profile.

THE BEAR CALL SPREAD

Stock 104

STO 105 c for $2

Trader receives $1 per share option premium (net credit).

Trader is obligated to deliver the stock at $105 per share.

Trader can obligate the market to sell him the stock for $110 per share.

Risk is $5 minus the premium received and is typically only

realized if the stock is above the short strike at expiration.

BTO 110 c for $1net credit is $1

THE BEST OF BOTH!

• A trader can increase the profit potential, and consequently reduce the potential risk, by doubling up on credit spreads.

• By executing a Bull Put Credit Spread and a Bear Call Credit Spread at the same time, a trader will executes an IRON CONDOR.

• More potential profit, less potential risk, NICE!

THE IRON CONDOR SPREAD

BTO 110 c for $1

STO 105 c for $2$1 credit

STO 100 P for $2

BTO 95 P for $1 $1 credit

Trader receives $1 per share net credit for selling the call spread

and $1 credit for selling the put spread ($2 total net credit).

The stock can only violate on spread or the other at expiration so

Risk is $5 minus the premium received, in this case $2 for a

total potential risk of $3. If the stock is between strikes at expiry,

All options expire worthless resulting in a $2 profit! ☺☺

TIGHTEN IT UP!

• A trader can FURTHER increase the profit potential, while simultaneously reducing the potential risk, by tightening the distance between credit spreads.

• By executing a Bull Put Spread and a Bear Call Spread at the same STRIKE PRICE, a trader will create an IRON BUTTERFLY!

• More potential profit, less potential risk, NICE, again!

THE IRON BUTTERFLY SPREAD

BTO 105 c for $2

STO 100 c for $4$2 credit

STO 100 p for $4

BTO 95 p for $2$2 credit

• Trader receives $2 per share net credit for selling the call spread

and $2 credit for selling the put spread ($4 total net credit). The

stock can only violate on spread or the other at expiration so the

risk is $5 minus the premium received, in this case $4, for a

total potential risk of $1.

• If the stock is at the short strike at expiry, all options expire

worthless resulting in a $4 profit! ☺☺☺☺

ATM options are typically represent the most expensive time value, so

The trader is likely to create more credit here on both spreads.

Stock 100

THE SPX WEEKLY OPTION

STOCK MARKET INCOME

• This is a cash settled index option.

• There is no stock to buy or sell.

• There are multiple weekly expirations.

• All expirations are based on the closing price at expiration.

• There are $5 wide strikes.

THE SPX WEEKLY IRON CONDOR

PRICE ACTIVITY

• We want to find out where the SPX price is likely to spend a good bit of time or “pin” to for the day.

• We look for the highest liquidity in the option chain for that expiration.

• That means finding the clusters of Open Interest and Volume.

• We identify which cluster is within the ATR for the SPX for the last 7 days.

WHERE TO LOOK

• Strike prices that end in 00

• Known support or resistance levels.

• Volume spike from the day before expiration.

THE IRON BUTTERFLY SPREAD

BTO 2905 c for $1.75

STO 2900 c for $4$2.25 credit

STO 2900 p for $4

BTO 2895 p for $1.50$2.50 credit

• Trader receives $2.25 per share net credit for selling the call spread

and $2.50 credit for selling the put spread ($4.75 total net credit).

The SPX can only violate on one spread or the other at expiration

so the risk is $5 minus the premium received, in this case

$4.75, for a total potential risk of $.25

• If the stock is at the short strike at expiry, all options expire

worthless resulting in a $4.75 profit! ☺☺☺☺

Set up the spread with the “Cluster” as the central (short) strikes.

$4.75 limit

HOW TO ENTER• Use the options that expire THAT DAY.

• Anchor the spread at the strike with the “cluster”.

• Click on the “bid” price as you are selling the spread.

• See if the “mid” price is more than $4.50

• Enter a limit order to sell the spread for $4.50 or more

NOT FILLED?• If you are not filled at the price you were

seeking after 15 minutes modify the order and reduce the price.

• Leave your “offer” for another 15 minutes.

• Continue the process until you get to $4.50, then leave the order in place.

• Do not chase price below $4.50 in credit

HOW TO EXIT

• Once you are filled on your offer, click on the “ask” price as you are buying the spread to close the trade.

• Set a limit buy price that will generate around $2 to $2.50 in profit.

• Leave the order up all day.

• If the order does not get filled to exit, you will only be exposed to the “risk” portion of the trade in cash.

FAQsQ: Does it work on all three weekly expirations?A: Yes it does.

Q: Is there a margin requirement?A: The Margin requirement is the difference betweenthe strikes ($5) and the credit received ($4.50 ormore)

Q: Should I exit the short option or let it go to expiration?A: Because this is a cash settled index and the risk is limited to the margin requirement of .50 or less, you may ket this go all the way to expiry/settlement.

I am not a registered broker-dealer or investment adviser. I will mention that I consider certain securitiesor positions to be good candidates for the types of strategies we are discussing or illustrating. Because Iconsider the securities or positions appropriate to the discussion or for illustration purposes does notmean that I am telling you to trade the strategies or securities. Keep in mind that we are not providingyou with recommendations or personalized advice about your trading activities. The information we areproviding is not tailored to any particular individual. Any mention of a particular security is not arecommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for anyspecific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation,regardless of whether we are discussing strategies that are intended to limit risk.

I am not subject to trading restrictions. Myself and other instructors could have a position in a security orinitiate a position in a security at any time.

presents the spx weekly iron butterfly - open tradez · 2020. 5. 20. · the iron condor spread bto...

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