Options Trading Case Study – FXE Iron Butterfly

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Iron butterfly: In tonight's video want to talk about all the trades that we made for Tuesday, June 2nd and then also cover one trade for June 1st which was Monday. Since there was only 1 trade on Monday we didn't cover it, so we'll cover it tonight in today's video.

Just as a heads up most of you know by now that we did make the decision to close down the lifetime membership option. It does completely go away on June 30th, so it gives you the rest of the month, about 28 days, to go ahead and sign up or upgrade to a lifetime membership. If you are already a lifetime member, great! If you are on the fence and need help and have questions, feel free to email me. I'm here. 

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This is not a closure at all on the premium membership, but it does mean that lifetime is going away because I want to keep that part of the membership as small as humanly possible. A lot of people have taken advantage of it, as you clearly or maybe seen in some of the emails that we sent out with some of the testimonials from previous members that have signed up, even people that have signed up today.

I want to make sure that it's still a small core group of people that we can obviously give as much value to as possible in the future, but this does mean that the premium membership if you don't sign up or don't have a premium membership is going to go up at the end of the month.

So, if you're interested in doing it this is honestly the best time you're going to get the most value out of doing it now and you'll be grandfathered in for everything else in the future. You won't have to pay anything else for any new features, or courses, or trainings, or anything like that that we roll on in the future.

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Getting back to the trading alerts for today. The 1st thing that we want to go over is our hedge trade in coach. This is 1 that we talked about a lot on the strategy call last weekend with premium members and we talked about it specifically as it relates to the dividend. The coach had a dividend that was going to go ex-dividend or tonight and tomorrow.

We had to make the decision do we hold this position, this 35 short call, or do we roll this trade to the next month. Holding this 35 short call puts us at risk of assignment if the extrinsic value of the 35 short call is less than the actual dividend that is being paid. At the time that we made this trade earlier in the day, the coach was rallying and trading much higher than they ended.

If you never got into this, you probably don't have that much of a risk of assignment at this point, probably almost no risk of assignment heading into tomorrow maybe 1 or 2 kind of crazy call buyers that exercise their options; but generally speaking, you don't have that much risk of assignment because of where coach ended up and where the extrinsic and intrinsic value of the options ended up as well.

That being said, though, at the time that we made the trade when the coach was kind of trading towards the high end of the range today above 36, we found that the extrinsic value was last, so we did decide to roll that contract out to the next month. We did that with a calendar spread, so it wasn't that we were entering a calendar spread, we kind of used that calendar spread to facilitate the role.

We bought back and closed out of our June shore 35 calls and then reestablished that same 35 shore call in July for a credit of 35 cents. That's all we did is roll that out to next month. As far as closing trades real quick on Monday, this is the 1 we were going to cover, but we didn't want to do a whole video just on this very small closing trade. We did buy back our PUT vertical spread an XRT for a 5 cent debit.

Basically, about as cheap as it's going to be up until expiration. With XRT it was that the stock had seen a little bit of a rally with the market, implied volatility did kind of drop from where we had sold it originally. It's not a huge winner, but it did decay almost to worthless between now and expiration.

We also decided to go ahead and sell out of our AAL calendar spread. We had a PUT calendar on American Airlines and looking for the stock to make a move lower, which it did today, and just a little pop in implied volatility and that's all we wanted to see. These are small calendar trades. This is just a means to stay active.

We don't mean for these things to be a real big part of our portfolio, but as AAL has continued to move just a little bit lower and as implied volatility has kind of creeped up from where it was before when we sold it, I think we bought this calendar when it was down in the 3rd or 5th percentile. It's creeped up just a little bit, but end all it ended up being a pretty good trade. We took more than our 25% gain out of it. We just want to go ahead and close that out. Sold it back for a 71 cent credit, $34 profit.

For our big trade today that we entered. This is a pretty large trade position size wise, and we want to scale things like this. We talked about this many times. When implied volatility is rich, when IV rankly is high, that's when you have to be more aggressive. We're going to leave a little bit more room here to increase our position and FXC, but this is stacking another trade in FXC on top of our already existing June position.

In FXC we sold the iron butterfly. Basically what that means is that we sold the 109 PUT and called on both sides; it's like doing a straddle right over the market. We have this straddle component right over 109. Then what we did, is we bought wings out on either end about $5 out, so that gives us this risk defied position.

It looks like a butterfly, but it's an iron condor; that's really what it's called because we have an iron condor type of strategy set up where we're doing a physical call spread and a physical PUT spread. It just happens that the peak or both of our short strikes are at the same strike price which is 109. The reason that we're doing this is that we're trying to take advantage of the high implied volatility that FXC has right now.

It's up in the 89 percentile, extremely high implied volatility. It's worked really well over the last couple of months; whereas, we've made some really good money on FXC over the last couple of months as it stays range bound as implied volatility goes from the 80s and 90s down to 70s and 60s, we've had a really good opportunity trading this, so we're going to keep doing it and continue to stack these trades 1 on top of 1 another.

We already have a position for June, so we're not messing with any of the positions in June right now. We'll manage those later or take those off later. We're continuing to build this position out in July. This new position is in July. We're stacking them, meaning layering 1 contract a month on top of another. You can see what we did down below was we sold the strikes that were pretty much on the money.

We took a little bit of a directional hedge, or bet here. We did the 109s versus the 110s; you could easily do the 110s if you think maybe that FXC might have higher, but we set a little bit of a directional bet lower. We sold the 109s. Again, we went $5 out on either end to 104 and then up to 114, and that gave us our risk defying position. At the end of the day, we have a risk defying position centered all around 109; that's ideally where we want the stock to finish up at the end of July.

Here's our position is FXC, and you can see this is the June position that we're looking at. It's got that nice, wide base here, and again risk defying because we bought the wings. If you don't want to buy the wings, you go with a regular short straddle, but it carries a lot of margins. Your return on capital is probably a little bit better with doing the risk defying position.

You give up a little premium, no doubt, but your return on actual money invested is probably a little bit better than doing the regular straddle.
Hopefully everyone enjoys tonight's video. If you have any comments or questions on the trades that we made, as always please add them right below in the membership area. And until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.