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Short Iron Butterfly

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Short Iron Butterfly

The Short Iron Butterfly was found to be the most profitable strategy in our backtesting.  In backtests, it was profitable 48.52% of the time with an average annual return of 52.72%.  For our real money account the percent of winners from October, 2016 through November, 2017 is 62.50% with a return of 156.51%

The Short Iron Butterfly combines a bull put spread (aka credit put spread) with a bear call spread (aka credit call spread).  It is non-directional in that a strong move in either direction hurts the trade.

The ideal situation is that the price of the underlying stock or ETF stays within a fairly narrow range.  Both the call spread and the put spread are sold at-the-money meaning that the strike of the put spread that is sold is as close as possible to the price of the underlying and the strike of the call spread that is sold is at that same price.

A bull put spread combines the sale of an at-the-money put option with the purchase of a put option at a strike price below the strike of the one that was sold.  The put that is bought defines the risk in the trade.  The most that can be lost if the price of the underlying stock or ETF plummets, is the width of the spread.  For example:

Suppose the price of SPY (an ETF that tracks the S&P 500) is at 200.  We could sell a put at a strike of 200 and buy one at a strike of 195.  The most that can be lost on that side of the position is the width of the spread (5.00 x 100=$500).

A bear call spread combines the sale of an at-the-money call option with the purchase of a call option at a strike price above the strike of the one that was sold.  The call that is bought defines the risk in the trade.  The most that can be lost if the price of the underlying stock or ETF zooms higher, is the width of the spread.  For example:

Suppose the price of SPY (an ETF that tracks the S&P 500) is at 200.  We could sell a call at a strike of 200 and buy one at a strike of 205.  The most that can be lost on that side of the position is the width of the spread (5.00 x 100=$500).

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But we receive a premium (aka credit) for both the call spread that was sold and the put spread that was sold.  If in our example we received a total credit of 3.00 then the most that can be lost is $500 – $300=$200 (you can only lose on one side or the other).

However, we found through our backtesting that it was more profitable to take profits when you have them.  By taking profits at a certain percent of the premium received, the long-term profitability is greater than simply letting the trade go to expiration.

There are other results of our backtesting that need to be explained as well.  There are many ways to execute an Short Iron Butterfly.  How far out in time should you go (i.e. what expiration should I use)

 While, by definition, the strike of the call and put that are sold are as close as possible to the price of the underlying, but what strike prices should be used for the put and the call that are bought?  When should profits be taken?

When should a loss be taken?  What level of implied volatility is best for doing the trade-above a certain level the strategy works but below a certain level it does not?  Should one use monthly options or are weekly options OK to use? Which stocks or ETF’s should be used?

At Humanstartups.com, we have answered all of these questions.  We know of no other service or options educator that answers these questions for their clients.  Either they don’t know, or worse, they don’t want to tell their clients since that would be the end of the road.  Isn’t it better that the client continue to struggle to be profitable so that they will continue to invest in their “teacher”?

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