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

Just like our iron condor, September was also a losing month for our Iron Butterfly Model Portfolio. Although we put on a slightly bearish iron butterfly when we opened the trade on Aug 7, it was not bearish enough. Our September Iron Butterfly was closed on August 21 when we came close to our stop loss target of $375 per contract (i.e. 1.5 times our profit target).

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 September 2015 is a total profit of $964.

The main problem I had in managing the September IB trade was the lack of quotes for the ITM put options (see option chain below) when the market fell. It is hard to work out your unrealised losses correctly when you cannot see prices for your options. Our 5450 put option was deep ITM when XJO fell to 5200. I had to keep requesting for quotes from the market maker. I decided to close the trade when we got close to our stop loss. Bid/ask spreads were huge so I was not sure what price our order would be filled at. Normally we can get filled at close to mid prices but it is much harder to get filled at a good price when the market is falling heavily.

I opened our October iron butterfly on 2 Sept 2015 which was 43 DTE. I decided to sell an ATM IB at 4775/5025/5275. IV rank was 88% when I opened the trade and thanks to the big spike in IV, I managed to collect 198 points of credit for this 250 point iron butterfly! The maximum profit for 1 contract is $1980 and the maximum loss (and margin required) is only $520 ($2500 – $1980 received). Butterflies are cheap when IV is high. Although the market is volatile, our IB trades have become safer as our maximum loss is reduced. Our breakeven points for this trade are 4827 (5025 – 198) and 5223 (5025 + 198).

I will provide a monthly update on this XJO Iron Butterfly portfolio. The next update will be in October 2015 after we open our November trade.

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...