This post is another in a series that we will be publishing which track the hypothetical performance of broken wing butterfly trades selected by Greg Loehr of Optionsbuzz.com.
Every now and then in trading, you hit a home run. You may not expect it and you certainly can’t count on it. But it definitely won’t happen unless you give yourself the chance. It happened today with the broken wing butterfly I selected last week.
For a while now I’ve been blogging about broken wing butterflies and looking at this strategy from various angles, such as the high-probability of keeping the credit based on the fact that the options are traded out of the money; and the ability to sustain large moves in the market (when constructed properly) before reaching a loss exit. I’ve also compared the trade to a typical credit spread that is sold out of the money where the similarities are numerous. But the one thing that a typical credit spread cannot give you is a profit larger than the entry credit. This is where it gets fun.
If a broken wing fly is entered into for a credit, and all of the options expire worthless and OTM at expiration, then, just like a credit spread, you keep the credit. But unlike the typical credit spread, the broken wing butterfly comes with a built-in profit potential that can far outpace the profit of the credit. The butterfly I selected last week, and which just expired today, was the SPX 1385-1380-1370 put butterfly for a 35-cent credit. Maximum risk was $4.65 – which the trade never came close to hitting (these butterflies rarely do when constructed and managed properly) – and a maximum profit of 35 cents plus $5.00.
Getting the max reward on any butterfly just doesn’t happen often since the max profit can only occur at one price point. But anything close is good enough. With the SPX finishing at 1379.85 this week’s butterfly was only 15 cents away from hitting the maximum profit – but as I said, close is good enough. For a trade that can, rather boringly, grind out anywhere from 1-7% or more in any week from the credit (subject to market conditions of course), having a final profit of 112% is a moment to savor. The final price for the butterfly was $4.85; adding in the entry credit of $0.35 gives a net profit of $5.20. Divide that by the theoretical max risk of $4.65 and you get the final percentage profit.
I was too busy watching this trade yesterday and today to give next week’s butterfly much thought, but will do so come Monday. Want more information on how or why this particular butterfly was selected? Click on the banner below to order the Broken Wing Butterfly Series in which I discuss this trade in four videos; and as a bonus you’ll receive one free hour of coaching with me.
Trade safe!
Greg Loehr
Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commisions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.
No relevant positions.
