- An iron butterfly is an options trade which can be considered low risk with high rewards. Here is an example of a short position in OEX Oct 14 880/890/900 Iron Butterfly. In this example, the risk for this trade is $390 and the reward is $610. If by expiration date, Oct-18-2014, the value of OEX is 890, then the owner of this short position will pocket the $610 that was credited (deposited) to his account. However, any movement up or down from 890, his account loses by that much multiplied by 100. For example, if OEX closed at 889 by expiration, then he lost $100 = (890-889)*100. He will break-even at 883.90 < OEX < 896.10. As of this writing, there are 47 more days before expiration of this option position.
Short Iron Butterfly Risk Profile - The graph below shows that OEX is currently (Sep-01-2014) at 889 but with more than a month still before expiration, OEX has 33% probability of being exactly where it is right now, 33% of being higher and 33% of being lower. So our chances of being correct is only 33%. The purpose of this blog is to record the adjustments that we will be doing on this position as OEX continue to move either up or down. Our goal is to make this trade a profitable one by adjusting, as needed.
OEX Trend Chart, 9/1/14 - The following will be the guidelines for our adjustment:
- No more than 1 adjustment per week
- Do not increase the risk of the position greater than the credited amount
- No rolling out of positions
- I'll add more rules as I learn how to adjust trades
- Sep-05-2014, OEX closed the week at 890.48. No adjustment needed.
Risk Metrics, 9/5/14 - Sep-12-2014, OEX closed the week at 883.90. No adjustment needed.
- Sept-19-2014, OEX closed the week at 897.09. This is greater than our break-even value of 896.10 but the charts show a shooting star which could be a reversal pattern. I will not make any adjustment until a bullish pattern is validated.
OEX Graph, 9/19/2014
Monday, September 1, 2014
How To Profit From An Iron Butterfly Trade
