Weekly Pin Butterfly Strategy

Discussion in 'Journals' started by caroy, Jan 6, 2021.

  1. caroy


    Creating this journal to log and share a weekly strategy in using butterflies.

    Premise: On expiration days equity prices tend to pin around the strike with the highest open interest. (Would love to have historical data to prove this and have posed this question on another forum in ET)


    1. Identify equities with high IV rank and decent liquidity where open interest in the options expiring on a weekly basis have a demonstrated open interest higher at one strike than the others.

    2. Enter a 1:3:2 or 1:2:1 broken wing butterfly targeting the short guts at the strike with the highest open interest. The initial position will have a directional bias with the opinion that the underlying equity will move towards the strike with the highest open interest. These spreads will be entered with a net credit that covers all execution costs and provides a winning trade if the equity moves counter to the strike with the highest open interest.

    3. Profit / Loss Maximum profit met with the stock at the strike price with the highest open interest on expiration. Minimum profit is the credit received. Max loss on each trade follows the usual butterfly set up and occurs is the stock moves up through the long wing with calls or below the lower wing with puts.

    4. Risk management - Max risk on each trade will be no more than 1% of my tradeable capital.

    5. Trade management - using the broken wing set up provides and initial credit. Once the trade is on if the underlying moves away from the strike i will roll down the broken wing in calls and up the broken wing in puts to balance the spread. Ideally I will pay no more than half the initial premium collected to make this adjustment. The adjustment narrows risk and balances the trade. Profit zone when ITM will be set at 35% of max profit but may be adjusted up or down on expiration day based on market conditions. Risk of early exercise on the short guts will hopefully be minimal but if happens will be offset by exercising the long wing and then trading out of the remaining spread. This should not exceed in a worst case scenario the original max risk.

    My goal will be to initiate two of these trades each Monday. Will post any adjustment or rolls midweek and over the weekend the final results from that week. I plan to use the journal for about two months to provide a transparent analysis of whether this strategy is successful or not for a total of 16 trades. I'll then provide a complete breakdown of number of winners / losers and total return.

    Open to feedback for sure. Appreciate the comments on the options forum and advice that I've incorporated into this strategy from a number of posters. Looking forward to piloting this and also to the accountability the journal page can provide.

    For the sake of giving this strategy a name I'm going to go with "Butterfly Crush". Full disclosure my ten year old daughter liked the name but asked me not to smash real butterflies.
    longandshort, ironchef, cesfx and 3 others like this.
  2. .sigma



    just joking!

    subbed! Definitely looking forward to your thoughts!
  3. caroy


    Adding a bit to this strategy for weeklies. I'm going to add an Iron Fly trade or two every Wednesday towards the close to play a quick collapse the following trading day. Similar risk management rules no more than one percent on any trade. Will probably just look to do one or two different trades.

    Adding a straddle expiration day play as well. Buying an ATM in a stock with pinning probability with high OI at various strikes for the crossing effect. Will buy in around 9 AM and look for a profitable exit before 2 pm. These last two concepts are based on some of the strategies outlined in "Trading Options at Expiration"
    .sigma and ffs1001 like this.
  4. caroy


    And were off.

    Trades entered Monday January 11, 2021

    1:3:2 Call Fly in CHWY 98-100-102 credit $0.17

    1:2:1 Call Fly in DKNG 54-55-56 debit $0.10

    1:2:1 Call Fly in TLT 152-154-156 debit $0.31
    .sigma and ffs1001 like this.
  5. caroy


    Adding a longer term fly this morning mainly as protection against a pull back in the markets in February. I carry some short put positions and a few equities I'm running the wheel on and some poor man covered calls.

    VXX 1:2:1 call fly at 16-24-32 strikes FEB 26 EXP for a debit of $0.99
    .sigma and ffs1001 like this.
  6. caroy


    Tuesday night update. Looking promising in DKNG, CHWY is chewing me up might have to sell a put spread below my high strikes recoup some to avoid full loss but will see what tomorrow brings. TLT is edging into the profit wing. VXX hedge hanging in there.

    Plan to sell one or two iron flies on the close tomorrow. Looking through some candidates tonight to play the theta decay Wednesday night into Thursday morning. Will give me something to do during a long work related zoom call scheduled for the afternoon. The day job leaves a lot of windows to put a trade on as we haven't been able to travel since March. I work as a university administrator doing major gift fundraising and usually it's on a flight Sunday night for face to face wining and dining over stories of campus life. It's enjoyable work and you meet some pretty wonderful people. The professor crown is as entertaining as it gets. Dialing for dollars feels like selling aluminum siding though and my eyes hurt after the screen all day. One of our largest donors is a large natural gas trader and has some pretty fabulous trading stories.

    The iron fly idea is coming from the Augen book. I've traded a number of them in the past but with more of a 45 DTE and would roll down or up the untested side as management. Looking to make 10% on them close to open range. Might stick with one although the buying power is very low for these trades. Width will depend on the price of the underlying and bull or bear bias on the strikes with highest open interest.

    I'm thinkin maybe a 1:2:1 set up on Monday for my regular weekly flies and then add the spread to make it 1:3:2 a couple of day's later. I need to get away from thinking I need to collect some premium on these at initial set up. Maybe I'm wrong on this. There aren't too many adjustments to make when these are weekly plays. If anyone has some concepts around adjusting short term flies to avoid max loss I'm all ears to those who have been there done that.

    Anyone have rules of thumb for initial fly set ups? When to use 1:3:2 vs 1:2:1, or 2:3:1. Skew alignment? Is one better for puts vs. calls?
  7. Sampas


    may I ask what fees do you pay? I pay 1$ per leg in Interactive Brokers and such tinny spreads would cost me too much to win anything after commissions.
    Good luck on your trades!
  8. caroy


    I'm paying the $1 as well through tastyworks. And yes you point out a downside of trading flies is with the multiple legs it eats up profit. Paying $5 exercise fees per option is a pain as well. That's why ones that have gone max loss I usually exit a few pennies above to avoid a bigger hit with fees. In some sense the fly when it hits is a great R/R trade. I'm working on my management of them to recoup these. You can break a wing and collect a credit but if it blows through like it did in my RIOT fly last week it's all for naught. Good luck with your trades as well. In general these are just part of my overall strategy. I work other things as well but really enjoy the flies. Full disclosure my dog's name is Butters. Go figure.
  9. caroy


    With CHWY chewing me up to the upside I sold the 102-88 put spread against it for$0.68 this plus the initial credit of $0.17 keeps the max loss potential at $1.15 down from $2. Not thinking this one will come back into the profit zone. TLT and DKNG looking better and better. Selling a couple iron flies on the close. Eyeing TWTR and SNAP with IV rank close to 50.
  10. caroy


    Sold the following. Looking to exit tomorrow.

    Iron Fly SNAP 51-54-74 @ $1.59 credit

    Selection based on high IV rank and arrangement of possible high OI pinning strikes.

    Closed TLT 152-154-156 @ $0.75 profit of $44 minus commission $40 winner winner
    #10     Jan 13, 2021
    .sigma likes this.