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Originally Posted by barn32
If you don't mind just to clarify:
1. After establishing the initial butterfly spread, are you purchasing 1 IWM call (40,50,60) points out of the money or whatever as a proxy for the stock?
2. let's say the initial spread looks something like this:
1050 (buy 1)
1100 (sell 2)
1150 (buy 1)
And now the Russel takes a 30 (or 40, or 50) point drop to 1070~.
Do you wait until it drops below 1050 to roll down, or are you rolling down now because it dropped more than 20 points below your middle strike?
And, if and when you do roll down do you also purchase another IWM call at the same time? Roll down your first IWM call? Or let it stand?
Thanks
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I'm purchasing 1 IWM call that is DEEP in the money.
This is the most recent trade I made, which I closed out yesterday for full profit (a little over $500 including commissions).
Opening day = September 15, 2014 (I broke the M3 rule about buying around 50 days out...I believe there were about 30 days to expiration when I got into this trade, but that's because I held my September trade much longer than I should, and I didn't even think about opening the October trade, which I probably should have done...but I've gotten away with breaking this rule in the past...when you break this rule, you're basically giving up all chance to adjust if something goes very wrong to the downside especially).
Bought 1 RUT Oct 18 2014 1170.0 Put @ 37.63
Sold 2 RUT Oct 18 2014 1120.0 Put @ 15.99
Bought 1 RUT Oct 18 2014 1070.0 Put @ 6.35
Bought 1 IWM Oct 18 2014 107.0 Call @ 7.42
As you can see, the 1 IWM call I bought was well
in-the-money, as it was trading around 114 on September 15, when I bought the 107 call.
I exited on September 26:
Sold 1 RUT Oct 18 2014 1170.0 Put @ 56.54
Bought 2 RUT Oct 18 2014 1120.0 Put @ 21.3
Sold 1 RUT Oct 18 2014 1070.0 Put @ 6.56
Sold 1 IWM Oct 18 2014 107.0 Call @ 4.58
Profit was about $518 including commissions (commissions were a little under $50 roundtrip...like I said, commissions aren't very good on TDAmeritrade...$9.99 per trade plus $.75 per option. So in the above trade, each side costs $23.73...$9.99+$3 for the butterfly, and $9.99+$.75 for the IWM call).
As for your downside adjustment example, I would wait until it gets to 1030 before I roll down 20 points...of course, if this happens late in the game, you're likely just going to exit the trade at a $500 loss instead of rolling down. That's the reason for getting in 50 days prior to expiration...you have time to adjust in case things go south early on...
As for what to do with the call when you roll down, it all depends on what the trade looks like after you roll down the butterfly...will the existing call be enough to have a comfortable delta with the new butterfly? Or will you need to add another call? Or will you sell the existing call and purchase a new one?
I've never had to do this yet to the downside...the last time I remember having to roll to the upside, I was able to keep the IWM call as is...despite rolling up 40 points instead of the recommended 20 points, and that's because I must have held on a bit longer than I should have...I use the rules as a general guideline, but I also pay attention to the overall market and the daily charts to determine how risky it might be to break certain rules...
