$264 Profit w/ FXI Iron Butterfly Option Strategy

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Iron butterfly option strategy: In tonight’s video, we’re going to cover all the opening and closing trades that we had on Thursday, June 25th. It’s crazy that we’re already almost towards the end of June.

We just finished expiration week. Now, we’re heading into the end of June here and still being pretty active and starting to get a little bit more active with earnings trades. But before I even cover the trades that we made today, I just wanted to cover a trade that we made yesterday and closed it out.

And I completely forgot to cover it in our nightly video. It was a closing trade that was profitable. Again, this trade in FXI was yesterday, June 24th, not today, June 25th, but I just want to cover them in today’s video because I forgot to last night.

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We went ahead and closed out of a part of our big position in FXI. And we did this automatically because as soon as we put in a working order or a new trade, we’ll automatically go in right behind it and place the closing order and use a GTC or “good till cancelled” order and just have that continuously working until it hits us out or we make an adjustment.

In this case, we had that order working for a long time to get us out at about 240. That was our profit target based on where we have our exit points. Inside the membership area, you can download our guides on how to exit trades if you’re a premium member. And as soon as we hit those profit targets, it automatically gets us out.

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We did this with FXI. We got out of our 49, 54 calls and our 49, 44 puts for a 240 debit. Again, we do not intend to hold this thing all the way through expiration. We took a nice $246 profit on this part of the trade. With FXI, what we saw as the key to this trade is that implied volatility has gone down since we entered the trade, that’s been great, and more or less, the stock has traded sideways.

It’s traded just a little bit against us, but that has helped out that implied volatility is going down faster than the stock has traded against us. And when we initiated this trade, it was up in the 70s as far as IV percentile, and now it’s down in the 50. It just goes to show you how much you can make with just a very slight drop in implied volatility.

With the earnings trade today, we also closed out of our BBBY trade. Again, we just went ahead and bought back the puts which were the ones that were really at risk. The stock opened up considerably lower, so the only thing we had to buyback is our 67 puts. We’re going to leave the 74 ½ calls.

I believe they’re 74 ½ calls that are above the market to go ahead and expire worthless tomorrow. You can see here’s where BBBY opened. It had a huge drop in implied volatility as expected. The stock opened up lower, but well within the expected range. And again, we’ve got I believe the 74 ½ calls.

Those are so far out right now for one day to go; it's not worth buying them back. It would probably cost us more in commission than they’re actually worth. In this case, it was a nice quick little earning trade. And again, it just helps get us started here for the next earnings cycle that's going to continue to ramp up more and more.

We had two new trades that we entered today. The first trade is our TLT massive iron butterfly that we had for August. Now again, as we talked about with premium members last week on the strategy call, we decided to go with August because now, July is getting a little bit too close as far as the number of trading days.

We want to trade something far out, but not too far out. And July is just way too close right now, so we had to go out to August. And in this case, we wanted to make it a very wide, very big iron butterfly. And really, what we’re trying to do here is replicate a straddle strategy.

We’re trying to sell options right at the money, in this case, the 117 calls, the 117 puts, and then go out $10 on either end and buy protection on either end. We went all the way out to the 127 calls and all the way down to the 107 puts and bought protection out there. We took in a nice big credit of about $503 on this trade for TLT.

And actually, the reason that we’re continuing to do this in TLT is that implied volatility still stays up in the 71st percentile. The implied volatility that high, we have to be a little bit more aggressive in how we sell premium. And we’re just ever so slightly tilting this a little bit bullish just to give us maybe possibly a pop-up in bonds as we cover the next month or so.

Here's what the position looks like in TLT for the next expiration month. We’ve already got the position now in July, but what we’re looking at here is just August. And you can see it's a very wide, very big iron butterfly. And what we’re trying to do is just get an extremely wide base here by moving our breakeven points $5 out either end of where we sold premium at 117.

And that's what gives us these wide break even points on the stock. Anywhere from 122 to about 112 is our range in TLT. If we go back to the chart here, then we can see for August that we’re looking at a range of about 122 to about 112 which is below where the chart is actually sitting.

A very nice wide range, but again, what we’re looking for more than that is just a drop in implied volatility. That’s going to make these options decay a lot faster and give us an opportunity to take some money off the table a lot quicker.

Alright, the newest trade that we had today, earnings wise, is a trade in Nike. Nike had pretty good implied volatility. I wouldn’t call it crazy high. I would’ve love to do a strangle or a straddle on this. But with implied volatility just over that 50th percentile, what we decided to do is be a little bit more conservative and do a $1 wide iron condor.

Now, the good thing about this iron condor is that we’re taking in a pretty good credit. We took a $.43 credit on a $1 wide iron condor, so we don't have exactly 1:1 risk to reward ratio, meaning we’re not risking $.50 to make $.50, but we're pretty close to a 1:1 reward, and we got outside of the expected move.

I would make this trade every single day if I possibly could on an earnings trade because we took in a very massive credit that was more than enough to compensate us for the risk in the trade. The fact that we were able to sell premium at 108, 109 and 102, 101 on the put side gave us a very wide range that was outside of the expected move for Nike.

Again, implied volatility is just over that 50th percentile, about 55%, 56%. Nike usually sees a good drop in implied volatility, so that’s why we want to historically just do a visual backtest on it, see if the thing has some well-implied volatility.

And then more so than that, we always want to make sure that we’re outside of the expected move. We’re just outside of the expected move, taking in a nice premium. On the outside of this trade, it has about a 70% chance of success going into the earnings event.

Now after hours, Nike is trading much higher on its announcement that it had excellent earnings. Right now, the stock is trading just towards our break even point. That’s where it closed. We’ll see what happens tomorrow when the stock opens up. It could open up much higher, much lower. Our first initial reaction with Nike is going to be to take this leg; this calls spread leg, and we’re going to roll it out to the monthlies.

Instead of being on the June weeklies, we’re going to turn this call spread leg out to the monthly contracts which are July, and we’re not going to touch the legs, we’re not going to move them. We’re going to do the 108, 109 call spread in July, not moving the side that the market is testing or moving against. And then what we’re going to do is we’re going to slide up or add a new position that’s much closer to the market.

And basically what we’re trying to do is to create an iron butterfly or an iron condor right over where this new pricing is. Think about it as sliding up this iron condor from where it is existing, to sliding it a little bit higher and re-centering or rebalancing the trade over the market.

We’ve got a ton of video tutorials on how we do that. Please use those as a refresher tonight to get your feet wet on how we might make these adjustments before tomorrow happens and where the stock opens up.

But as always, if you guys have any questions or comments, please add them right below this page inside the membership area. That way, everybody has a chance to learn and grow from these trades. And as always, 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.