Trade Details & Summary

USO Iron Butterfly (LIVE Closing Trade)

Today we're closing out of our iron butterfly position in USO by only purchasing back the short strangle or inside short strikes since the OTM long strikes are not worth any money and we don't want to waste commissions trying to close those ends.


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Was This Helpful? Add Comments/Questions

  • Great to hear that your binge watching videos haha! Yes we did negotiate our commissions lower over time. See this podcast on the entire process and script we used: https://optionalpha.com/show20

    • Sam

      I KNOW, you are against binge watching :) and it wasn’t my intention I just sort of ended up watching the next video then the next one and so on, plus I’m not new to options trading so it was a lot of fun. Anyway thanks for referring me to the podcast. I plan on using your script at the end to the year to reduce my commission. Thanks again!

      • As long as you binge watch OA you’re good :) well that, and Game of Thrones

  • Depends on the situation – most of the time the GTC order is for the full iron butterfly.

  • Yes when the underling price is low I often find the iron butterfly is better to take in a larger premium and just manage it quicker. We also trade OIH, XOP and XLE in the same sector which are higher priced.

Show Video Transcript +

In this video, I want to go through hopefully a closing trade here for our position in USO. USO is an oil ETF, United States oil ETF. And we had originally sold a nice big iron butterfly in USO a little while ago. I think we actually got into this trade back on 2/25.

It’s been over a month now. It’s taking the trade a little bit longer to come in than usual. But we kept our position size small, so we were able to hold onto this thing and ride out a little bit of the volatility in the oil market. Now, this trade is reaching our profit target at around $70.

Again, this is an iron condor, it’s listed as an iron butterfly, but since we have the same short strikes at the 9 call and the 9 put, it gives us nice iron butterfly payoff statements. Here’s the oil position that we have in USO. You can see the maximum profit it’s made that the stock close is at 9.

Today, oil is down big time and the oil ETF is down to 937 which has helped this position come in a little bit more. Again, like I said, we entered this trade back on 2/25. When we go to the chart here, you can see 2/25 was right about here.

This day right before the red day right here, that was when we originally entered this trade. And again, we wanted to pin oil at around $9. That’s what we’re trying to shoot for when we originally entered the trade.

Now, this trade has completely gone against us, except for basically the last week or so. But again, as we always try to do here with our trades that are high probability trades, sometimes you have to let the trade work and let the probabilities work out and trust in the fact that over time, you may be challenged early in a trade, but it also can turn around and become a winner.

This is a great example of that because we sold options here when implied volatility was high. And implied volatility has since dropped. That’s really helped our position. We were initially challenged as the stock ran against us and broke out and created a losing situation, but we held on.

And now that the stock is coming back in and is starting to move a little bit lower, it gives us an opportunity to take money off the table. We really haven't had a chance to take this trade off at a profit, except for really today.

We originally sold each of these iron butterflies in USO for $145 apiece. They’re now trading at about $72 apiece, so that’s definitely within our profit target range. And you can see today, we’re up about $57, making around $217 on this trade overall.

What we’re going to do here is we’re just going to close out of the short strikes. This is a little bit different than what we typically do. And I want to go over this because it's obviously important. And this is all live, real-time, real money trading; it’s not a paper account.

But you can see there that our long strikes at 12 and 6 for USO (since there are only 14 days to go) are practically worthless. They’re not worth anything to close them out. In fact, we can save a little bit of commission probably by not closing out those particular legs.

If we were to choose one of them, maybe we close out the long 12s because we can get $1 ½ for each of those. But first of all, that’s assuming that there's anybody that’s going to trade them. You’re much more likely to get a closing order filled if you just close out just your short strikes.

If we go back to our analyze tab here, all we’re going to do is we’re going to close out the two nine strike options that we have, we’re going to leave these six puts and 12 calls on as long lottery tickets.

In case oil goes crazy in the next 14 days, we’re going to lose maybe $3 or $4 by leaving these trades on and letting them expire worthless. But they act as long lottery tickets for our portfolio and sometimes randomly, they might payout a couple of dollars or so.

What we’re going to do here to close out just those short strikes is we’re going to right-click on the iron butterfly order and we’re going to go over to closing. You can see typically, what we would do is close out the entire spread or the entire iron condor.

But in this case, we only want to close out of this straddle portion or the 9 calls and 9 puts. If we go down here to buy back just the straddle, you can see we can do that right now for about $75 which is a good round number, we can try to shoot for something a little bit less, but honestly, we can just lock in a profit here.

We’ve waited a long time to actually see this trade come back in, so we’re going to go ahead and hit confirm and send, send this order in, see if we can’t get filled out pretty quickly since we’re trading options very close to where the market is. I think we’re actually out of the position already. We got filled almost immediately on this trade.

Notice it actually got filled at three different parties. One party did not take all three contracts, but all three contracts got filled immediately. They were split up and sent out to other people, but you can see we got out from each of those at the $75 debit.

That basically locks in the gain that we have in USO. Again, what we’re going to do now is just keep this new strangle because that’s basically what it is, it’s just a long strangle. Our resulting long positions on the 12 calls and the 6 puts, we’ll keep those on as long lottery tickets.

If we lose on these, we’ll end up losing another maybe $6 or so. It’s not going to be enough to make us want to close out this position and pay commissions to do so. A nice trade in USO, a nice little case study on just waiting and being patient with some of your trading to let these probabilities work themselves out.

Keep your position size small, so that you can withstand a little bit of pressure early in the expiration cycle. But this time in USO, it definitely worked out on our favor. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right blow. And until next time, happy trading!

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