IWM Iron Butterfly (LIVE Closing Trade)

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Iron butterfly: The market has just opened here, and we're going to go in and close out an IWM iron butterfly trade that we had. We had an excellent wide iron butterfly trade that we entered primarily when the market fell. And since then, the market has traded sideways, and that's helped our position. Everything in this trade is centered around the 100 strike.

Now, what we're going to do is we're just going to go here and close it out. We're now a couple of days from expiration. Just two days mainly from expiration. And you can see this right now is our IWM positions. We've got an iron condor on for February and then we've got another one on that we legged into in March as well. But this February position is making about $1,100 right now.

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iron butterfly

Now that we're close to expiration, we've got about a day left; there's not anything that we can do besides this. I mean, the stock is trading exactly perfectly where we want it. Remember, with these iron butterfly trades - Let me go to the trade tab here, so you guys can see this. With these iron butterfly trades, what you're looking for is you're looking for the stock to close at the peak of the butterfly. And in this case, this is what happened here with this iron butterfly.

We sold options at the 100 strikes. We sold the 100 strike calls and the 100 strike puts and then we bought options far out for protection and to reduce margins. We bought the 110 calls which are all the way out here and then we bought the 90 puts which are all the way down here. And again, that adds a layer of protection for our trade, so that if the market makes a significant move, then we're protected to the downside. But that also reduces our margin requirement on this trade.

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And now you can see with about a day and a half to go till expiration; the stock is trading exactly where we want it to be. We're going to go ahead and close out this trade. But what we're going to do instead of closing out the entire iron butterfly is we're just going to close out the short legs or the short strikes at the 100. And the reason that we're going to do that is that these are the only strikes that have any value left that we have to close out.

You'll notice that the two long strikes that we have, three contracts of each, these don't have any value left. Notice that the mark on these, there's no more value left in these, so there's nothing that we can have gain by selling them back or buying them back. I mean, we're going to pay more in commission than we are to close them out.

In this case, we're going to let these two long legs far out of the money expire worthlessly and we're just going to go ahead and buy back the short legs. All you got to do at least inside Thinkorswim is just right-click on the entire order. You're going to create a closing order and then you're going to go down to just buy the straddle.

Again, notice we're not buying back the entire iron condor. We're just buying back the straddle here at 100. And again, that's going also to give us a nice quicker fill. We're going to throw in a debit price of 150 because that's where it's trading and then just hit confirm and send. That should fill here pretty quickly and then we'll be out of this contract.

Alright, you can see now that that order did get filled here. It only took about a minute or so. Pause the video real quick. But you know that we're out now at the 150 debit, so we locked in that profit. And again, what is going to happen is that it's going to leave. In this case for the iron butterfly, it's going to leave on these two long legs, but again, there's no value left in them.

They're worth $.50 each, so there's nothing that we can gain, net of commissions to close those out. We'll just let those be out of the money and expire worthless over expiration. Hopefully, this was a splendid example of how to close out of an iron butterfly when you have a nice profit at the end of expiration.

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.