Hi All, I have been captivated lately by selling broken wing butterflies with breakeven near 2X expected move for earnings. Being a relatively new options trader, its difficult to find some best practices for trading BWB in regards to IV, DTE, when to close, and how to adjust. Looking for some helpful tips or links for articles or videos on this topic that you have found valuable and trust. Thanks!
Here's short SPX BWButterflies (5x10) positioned along with $5, $10, $15 verticals, and associated short deltas and N(δ,σ²). The (negative) prices reflect that on TWS, these are "bought" as the strike closest to the market is long. Prices include commissions. The blue line marks the market: data above the market are for calls, below are for puts.
Here's my 2cents worth. IV - Butterflies should generally be placed when volatility is high and expected to fall. There's no magic IV figure, like "open a fly when VIX is ....". DTE - They can be very theta sensitive, depending on DTE, so DTE is important, because when expiry is a long way away, the flies are very dull and lethargic strategies, and they come to life more and more as expiry nears. Generally, with just a week or so to go before expiry, expect rapid action (either positive or negative), depending on the underlying movement. When to close? I usually aim for around 20% profit, but it's just a personal thing. On some flies, I will aim for larger profits (if expiry is close), and on others I will settle for smaller profits (where expiry is a long way away, and hence theta is low, and the trade was opened more of a volatility play). I close also when the fly is making a loss and I cannot see a suitable adjustment to bring the trade back to within a reasonable profit tent. How to adjust - there are many adjustment options available (eg. moving short calls further out, moving long puts closer in etc etc), but it all depends on numerous factors at the time of adjustment: DTE, price of underlying, volatility. My experience is with non-earnings butterflies, but it seems that you are hoping to play the earnings event with flies. There are more specific factors at work here that you will need to cater for - eg. what is the expected move, the average move, previous history of earnings moves, the expected volatility collapse etc etc. Have a look at this video for starters : https://www.tastytrade.com/tt/shows/market-measures/episodes/earnings-butterflies-01-14-2014 Good luck, and feel free to post actual trades, as then people can respond more specifically to your questions.