$349 Profit Trading TLT Iron Butterflies This Month

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Iron butterfly option strategy: In tonight’s video update, we’re going to go over all the trades that we made for Monday, October 5th. It’s a good day; we had some trades that we’re going to start taking off here now that we get closer to October expiration, and really, we’re just trying to make trades off that are nice good winners.

That came in two forms today. It came with our straddles in USO and then with our iron butterflies in TLT. Now, we first took off our straddles in USO basically because the stock was trading right in between our two different straddles. The first one was centered around 14 1/2, so we sold the 14 1/2 call and put.

The second straddle that we did a couple of days after that was centered around 15 1/2, so that gave us about a breakeven point or a center for both average around 15. And that's basically where USO ended up trading today. Implied volatility has continued to drop, so we’re taking this trade-off, banking our nice little overall $105 profit with that trade.

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You can see USO closed exactly at 15 today. From the time that we entered this trade when implied volatility was high, now implied volatility has gone lower, it’s been cut down from around the 90th percentile down to around the 48th, and the stock hasn’t moved anywhere.

It’s had some movement up and down here and there, but generally speaking, it hasn’t moved anywhere. At this point, we’re not going to leave ourselves open to the exposure of possibly the stock making a big move before expiration. We’re going to take money off the table and obviously take what we can get.

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About our other position, we went ahead and took off as well our two iron butterflies in TLT. We had two different iron butterflies. The first one is centered around 128, so we’ve sold the 128 call and put and then bought options on either end. The second one is centered around 123 for TLT.

And as the market rallied higher today, this position started to move a little bit against us. We wanted to take everything off the table because we have a nice big fat profit in this thing and we want to keep that naturally. Overall in our trading of TLT this month, we took in $349 which is a pretty good premium, mainly because of the drop in implied volatility.

We saw that again with TLT. You can see the last month and a half that this position has been in place, basically implied volatility has gone from the 100th percentile, down to the 45th. And overall, the stock has gone nowhere, except today, it had just a little bit of a movement down.

But you can see this position went against us early in the cycle, and it just took a little while for it to come back around, but that’s what high probability trading is all about. You just have to give yourself an opportunity to hold this position through a cycle like that where we were looking at potentially a full loss if the stock stayed down here.

But you just keep your risk defined, get a position that we knew we could manage and handle. And we held through it, we knew implied volatility was on our side, continued to drop the entire time. What we don’t want to see right now is we don’t want to see in the last 10 days of trading here, the stock continue to move lower as the markets maybe move higher and this profit completely disappears.

You have to take money off the table when you get in situations like this. As always, I hope you guys enjoy these videos. If you have any comments or questions on these trades, please ask them right below. And 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.