Note to new readers: This is a regular update on the status of our XJO Iron Condor Model Portfolio. Please read the Iron Butterfly Trading Plan first in order to understand the objectives and the rules for trading this model portfolio.

Our May Iron Butterfly was closed on May 5 just before the RBA meeting. I decided to close this trade even though we had not met our profit target because the market tends to make big moves after the RBA meeting. The May trade was not a good trade right from the start. Our May trade was opened on April 16 when IV was low (IV rank of only 37%). The market became quite volatile after we opened our trade and IV rose sharply as shown in the chart of XVI (30 day IV for XJO) below:

Source: CommSec

For short premium trades like the Iron Butterfly, your unrealised profit will fall when IV rises even if the underlying’s price remains within your profit zone (see purple line in chart below). This is why we like to open IB trades when IV is high, preferably when IV rank is greater than 50%.

Source: TWS Risk Navigator

On May 5, 19 days after we opened our trade, XJO was trading inside our profit zone (5812 – 6088) but our profit was only $110. If IV had not risen, we probably would have been able to achieve our target profit. However, it was still a good decision to close our trade as the market fell heavily after May 5 and we would have ended up with a loss this month had we not closed our trade early. We track our monthly performance in a similar fashion as our first XJO Iron Condor Model Portfolio i.e. without including brokerage cost as this will vary from broker to broker. Our performance as at May 2015 is a net profit of $514.

I opened our June iron butterfly on 6 May 2015 which is 43 DTE. XJO was trading at around 5740 at the time so I sold an ATM IB at 5500/5750/6000. IV rank was 76% when I opened the trade and I managed to collect 165 points of credit for this 250 point iron butterfly. Due to the high IV, the credit collected is higher compared to what we collected last month. The maximum profit for 1 contract is $1650 and the maximum loss is $850 ($2500 – $1650 received). Our breakeven points for this trade are 5585 (5750 – 165) and 5915 (5750 + 165).

I will provide a monthly update on this XJO Iron Butterfly portfolio. The next update will be in June 2015.

Disclaimer: This post is for educational purposes only and should not be treated as investment advice. This strategy would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek investment advice if required.

 

Looking for something?

Use the form below to search the site:


Still not finding what you're looking for? Drop us a note so we can take care of it!

Visit our friends!

A few highly recommended friends...

Archives