TLT Iron Butterfly Option Trade Adjustment

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Iron butterfly: In this video update, I want to go through trying to close out of our TLT iron butterfly position. This is the second video that we've done here today. We did a video earlier today, which is in on our website posted already, and that is the FXE iron butterfly position that we closed for a profit, but now we're looking at another potential trade that we could close a profit.

That's our TLT iron butterfly position, which is the one here. This is a position, again, that we got into right after the Brexit vote. This is a position that we got back into on 06/16. I'm sorry. Right before the Brexit vote on 06/16. 

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iron butterfly

Implied volatility was high at the time. Today is July 20, I'm sorry, June 29th, so we haven't been in this trade all too long, less than about 10 days. We sold each of these iron butterflies for $435. They're now each trading for about $326. We're looking at a profit in less than 10 days of about $325 based on where it's at now. What we try to do with these iron butterflies is we take them off at 75% of the premium that is received initially.

When the value decays by 25%, we buy them back when they're worth about 75% of what we received for them. If you just use your calculator here, you can take 435, you can time that by 75%, and what that's going to do is it's going to get you a target price or a take-off price, managing price, of 326.

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We round down, or you can round it up or whatever you want to do, about 325 or so, and that's about where the spread is trading at right now. What we're going to do is we're going to try to take the whole thing off. This thing worked out excellent. You know what? Let's just place the order here real quick and see if we can't get it filled. We'll do it right at 325.

It's a good round number. See if we can't get the whole thing out here. Again, as that order's working in the market, what you see here is that we entered this trade back on the 16th of June. This trade was entered into back here on this high day before the Brexit talk or before the Brexit vote. We had to hold through a little bit of a decline in the value of TLT.

Remember, our strategy is centered around 137, which is up here. Holding through this was challenging, and we got a lot of emails from members saying, "What do we do?" We just said, "Look, you just got to hold it. That's what you have to do with a lot of these options trades." You got to let the probabilities play themselves out. We had to hold through that.

We got a nice rally up. What we see now is we see that implied volatility start to turn over and start to decline. Where we initially entered this trade and implied volatility was around 71, 72, now it's down to around 43, so nice drop in volatility. That's what's allowed this position to come in along with a little bit of time decay as we've gone through the last week and a half.

We do have the order working in here at about 325 or so. The market right now has moved up and nudged up to about 326, so we'll let this order work for just a little bit here. It's about 3:20 in the afternoon. We won't let it try to work all the way to the end of the day. We might try to look to adjust the order, maybe up by a dollar or so just to fill.

In this case, if the market's trading at about 325, 326, I'm okay paying another dollar per spread, so $3 overall, to bank off $330 profit. That to me is a good risk for reward ratio for getting out of the trade and getting it filled today. We'll let this trade work here just a little bit longer. I'll pause this video, and we'll come back as soon as we get filled.

All right. We're back here, and you can see that we did get filled, a couple of minutes later to get filled here on this TLT position. It was weird. I wish I would have recorded this, but it did take a little bit of time to fill, so I didn't want you guys to be sitting here on the screen, but it was trading below 325 for a little bit. It was trading 323 or so and finally got enough people here to be lined up for us to get out of this trade.

Another really good trade today, good, quick day of closing out some positions as volatility dropped. As always, hope you guys enjoyed these video updates. If you have any comments or questions, please ask them in the comments section right below. 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.