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Alternatively, have you sold an Iron Condor right before the market went racing higher or lower? Did you adjust or just panic and get out only to watch the market reverse before expiration? Trust me, I know the pain. Nobody ever said trading would be fun, did they? Fast directional movement is one of the biggest challenges we face as non-directional options income traders. The CIB is a non-directional, market neutral Butterfly options strategy. The image below shows a CI Butterfly shortly after the trade was initiated.
In this case, price began higher and traded into the center of the Butterfly. Notice that the trade has very little directional risk. One of the big things to note is that the absolute dollar risk in the CIB is slightly greater than the Iron Condor. However, the potential profit is significantly greater.
One of the reasons I began trading Butterflies in general is that they have the potential to provide a much more favorable risk: The CI Butterfly provides an opportunity to win many times the intended loss in the right market environment. CI Butterfly Options Trade: The image below shows another CI Butterfly that is close to expiration. I target an initial risk: For example, a Butterfly that has 50 point wings and costs The center of the Butterfly is positioned points below the money, which gives the trade more room on the downside and a slightly bearish bias.
Due to the slight bias, I make an effort to time my entry. Timing the trade perfectly will not make or break the trade, but it can make adjusting the trade easier.
Initiate the position days to expiration. I was originally trading the strategy with days to expiration, but found that I was frequently spending the first 10 days losing money. As a result, I moved the entry window back and generally enter days out. If the market trades lower, the Butterfly and long call are closed and rolled lower. On the upside, I add to the position up to two times before rolling up the lowest Butterfly. The philosophy behind the trade is that we stay smaller and more nimble when the market is moving down and willing to take on a little more risk on the upside.
By only adding to the position once, you reduce the dollars at risk and keep the greeks smaller overall. Like most higher probability options trades, the trade wins most of the time so a 1: The links below are some examples of previous trades, but keep in mind that my butterfly adjustment rules have changed slightly. April Butterfly Trade. March Butterfly Trade. March Butterfly Partial Close.
Let me know what questions you have in the comments below or via email. Your feedback allows me to make the discussion both more relevant and helpful for you! What are your adjustment points? How many CIB did you close with losses?
Do you have any other exit rule besides max loss? Having doubts is good; read the post below. The results might surprise you: The general idea is that I adjust when price trades outside of the expiration break even point on the upside.
That being said, I allow myself a little leeway and I do make decisions based on what I think might happen in the market. Yesterday morning is an interesting example. Price traded up to my adjustment point and began to fade. On the downside, I adjust before it exits the expiration break even and simply roll the position lower.
In addition to the basic adjustments above, I sometimes make adjustments based on the greeks as the trade approaches expiration. The October expiration has been challenging, but the trade is still healthy and starting to show a profit. If I had initiated the October trade one day earlier, I might have taken the max loss. Max loss is my primary exit rule. Another option would be to take off half rather than the full position.
Hi Dan Great thread. In percentage terms, Typically how much of your portfolio is capital at risk? Typically how much of a portfolio do you put into one CBI? Also — what is your profit target and stop loss levels? Do these vary with time as John Lockes M3 trade? I am a conservative trader and like to keep risk under control at all times.
I employ an optional early exit rule, which is the only real variation on profit taking. Another option would be to scale out of half of the trade if multiple positions were being traded. I maintain the same profit and loss targets over the course of the trade with the exception of the early exit rule. Thanks for your explanation! Do you add Flys on the upside based on the greeks i.
Also, when managing the trade by the greeks closer to expiry, do you have certain ratios you want to keep your trade close to ex. Sure, glad it helped. I only add Butterflies to the trade when price trades beyond the expiration break even on the upside. Even then, I give the market a little wiggle room maybe 5 or so extra points. Rather, I try to keep the trade slightly short delta with as little gamma as possible while remaining positive theta and negative vega.
If price remains within the body of the Butterfly the Greeks are usually fine. The exception is when the trade sits untouched for a while and then the market moves higher. The obvious danger is that price will trade lower shortly after making that adjustment. Something else to point out is that I don't use hard and fast rules. I usually consider my directional opinion on the market which is frequently wrong and what a 1 day 1 standard deviation move would do to the position. If a 1SD move would cause a major problem, I'll be looking for an adjustment to mitigate that risk.
But it needs Interactive Brokers. So it might not be useful for you because you use Think or Swimbut maybe some readers will find it useful: Hi Uwe and thanks for sharing your tool! Sounds like a good weekend project. Yes, it tries to subscribe to RUT which needs extra market data. Options market data was included in the big bundle in the past, but IB changed it.
Now it costs a little bit, but is waived if you trade a little bit. But you would not need the underlying market data — please let me know, if the program misbehaves in this case. Gotcha, that makes sense. What is the benefit of this trade over a broken wing butterfly with the upper leg that is locking in profit from the outset?
I saw this as a variation on The Road Trip Trade. Thanks for the comment. It will, however, take more heat on a down move. More to come on that. For a little more info on various butterfly trades, you might check out this post: Hi Dan, thanks for this great article and strategy.
I was wondering if one can use this strategy, or maybe some variation of it, to generate weekly income, instead of waiting to be profitable weeks out? My preference has always been to stay a little further out in time because positions move slower and have more adjustment options.
Picture of the CI Butterfly early in the trade. Risk and Position Comparison: CI Butterfly close to expiration. CI Butterfly Trading Philosophy: The image below shows a CI Butterfly trade after two upside adjustments: CI Butterfly that has been adjusted twice on the upside.
The trade is full size and will benefit significantly from a pull back in the market. Sign up for my email list and stay up to date with the latest information on options trading. Thanks for the post; its really interesting.
Dan from Theta Trend.