New Iron Butterfly Option Trade in POT

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Iron butterfly: In tonight's video we're going to go over all the trades that we made on Thursday, November 12th. It's actually been a couple of days since we actually made some trades, and that's okay. I know that some people were really excited for new trades I guess the last couple of days, because I get inundated with emails.

But sometimes it's better not to make trades and kind of sit on your hands and not force things into the market. So they were a little bit more active today, we saw some things that started to move, and pricing got a little bit better. So we took advantage of that across the board.

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So real quickly tonight, a couple closing trades that we had. We closed out of our HPQ Straddle. Now again, this is a trade that you could have had and been delivered HPE, your position could have been split. But whatever the case is, you should be out of your position at this point.

Now like I've said in a couple other videos, especially with elite members on the strategy calls, we were actually not delivered anything different than HPQ. So we remained in HPQ, it's just that the pricing was adjusted for the split of the company.

So we were able to buy those back, that Straddle back today for $1.70 debit. Basically just taking advantage of the move down that HPQ had today. And again that gave us a nice little profit of $76.00 overall. Implied volatility really didn't move for this position, but again, it was more of the move down today in the stock.

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Sold out of our calendar spread in ORCL, our calendar in ORCL finally came back into line. We saw a little bit of a drop, or a little bit of rising in implied volatility heading into this trade, which helps out. So implied volatility when we entered it was around the 20th, 23rd percentile, now it's around the 49, so we did take advantage of that rise in implied volatility, but more than that we wanted to pin everything around the 39 strikes.

And we didn't get there exactly, but we got a little bit of credit out of it and took a little bit of profit off the table. Small position, not a big thing, but ORCL, like I said, did have a nice little rally, we were expecting a rally. Moved much further than expected, and then corrected over the last two days.

And all along implied volatility was rising, so that helped our position overall, kind of that spread between the two calendar months. The new trade that we got into today is POT; this is an Iron Butterfly trade. When you enter this order on thinkorswim or most platforms, it will go in as an Iron Condor, but again, it is an Iron Butterfly spread, only because our short strikes are the same.

So it acts very similarly to a Straddle, with protection on either end. You can say we sold the 20 puts and the 20 calls on either end and then we went out $5.00 on either end and bought protection for those. And notice, protection that we bought is cheap Okay, so we're not spending a lot of money.

We're not trying to eat up a ton of this overall credit that we took in. We're spending $7.00 and $5.00 respectively to turn this trade into a risk-defined position. And again, a little bit higher allocation because we know statistically from our performance that's now posted that we end up making a lot more money on these types of trades.

So we're going to allocate just a little bit more to this type of trade. Implied volatility is in the 77th percentile. Our outlook on the stock is pretty much neutral. We don't expect this stock to go anywhere, or at least that's the way that we're playing it right now. So we've got no opinion on it, but you can see implied volatility rose just a little bit at the end of the day too.

But really, we want this thing to land somewhere around 20. And remember, we bought protection further out, at strikes at 25 and 15, but this is ideally where we want the stock to land, is somewhere in this range. Or to see implied volatility go down between now and expiration. The other trade that we got into today is another Credit Spread.

This is an XOP. XOP had really good pricing today, so we went ahead and did a $2.00 wide spread. We sold the 39's, bought the 41 strike. Implied volatility is in the 67th percentile; we did this right at the 30% probability of being in the money. That gives us an overall probability of success of about 70% on this trade.

So that's why we're doing our allocation just a little bit higher, we're selling five of these spreads $2.00 wide. And our outlook on this thing is bearish. Because we're selling the call spread above the market, the call cred spread above the market; we ideally want to see XOP continue to move lower over the next month or so.

So we sold the 39's which give us kind of a break even or line in the sand somewhere around here. We're bearish on the stock. We would love to see this ETF continue to move lower, as implied volatility maybe drops or continues to move lower over the next month. So we're going to hold onto this position, it's risk-defined, we will likely not do much adjusting if any adjusting to this type of position.

But this is a great little position to get into, especially if you're new to trading, or if you're just getting started with our program. You're probably not going to do 5 contracts, but you can do 1 contract, or you can even make these strikes a little bit more narrow. So instead of doing the 39/41, you could do the 39/40, and take in about $0.30 in credit as well.

So whatever you end up wanting to do, it's okay. Just make sure that you obviously adjust it to your position size and your account size. The last trade that we're going to talk about tonight is our final closing trade in P, which is Pandora. This is our Strangle inverted that we legged into after earnings.

So after earnings, Pandora made a huge move lower, we rolled our position out to November like we always do, that was our first trade, and then we went inverted. And what inverted again means is that we have our 13 calls which are above, I'm sorry, which are below our 19 puts.

So you'll notice that it's not really like a traditional Strangle, where you'd have that calls that are higher than the puts. In this case, our put strike at 19 is higher than the calls. Now, when this happens, the least that this spread can trade for is the difference between the strikes, okay?

So again, when this happens, when you go inverted on a trade, the least that this trade can trade for, or this spread can trade for, is the difference between the strikes, which is $6.00. Now in our case, we bought the spread back today for a $6.40 debit, so that means that the only money that we had left on the table to possibly make back was about $40.00 when everything is said and done.

So we couldn't make back the value of this and let this thing go all the way to zero. It would always trade for $6.00, which is the difference between these strikes, right? Because at that point you'd be able to sell stock at 19 and buy it back at 13, which is that $6.00 difference. In the case of Pandora, we took a total loss of $344.00 after everything was said and done.

We did make back a little bit of money on our hedge. So the hedge worked out. Here's a look at what the stock did. And this is again a great little case study on why we like to extend our trading timeline. So the stock opened up much much lower during earnings, right? So it opened up down here in the mid-12's, and we held onto this position as it started to move further down the month.

And it did have a little bit of a pull back, right? And it could continue to pull back now or later on, but we just decided to get out of the position. But it did have a little bit of a pull back, and you can see that helped the decay of the value of the options, and make back some of the money that we would have lost had we done nothing at all and just exited the trade the day of earnings.

So I always believe that it's better overall for your entire portfolio to make this type of adjustment, and to give yourself an opportunity to make back some money, rather than just taking what the market gives you on that, earnings day, and then just moving on. Now, in this case, we always like to see implied volatility also drop, but we didn't get that in Pandora.

So now what we're going to be doing is looking at Pandora as a new monthly trade, very similar to what we did with POT. We're not going to be scared of this trade; we're just going to now look at this trade new tomorrow and see if we can't get into a trade, maybe an Iron Butterfly or another Strangle Straddle.

That kind of resets our probabilities around where the stock is trading. As always, I hope you guys enjoy these videos. If you have any comments or questions, please let me know, add them right below here. I'll make sure to get back to all those tonight or tomorrow. And 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.