Note to new readers: This is an 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.

October was another winning month for our Iron Butterfly Model Portfolio. Our October Iron Butterfly was closed on September 16; the day after Australia unexpectedly announced a new Prime Minister! With a new popular business savvy PM and expectations that the US Fed will not raise interest rates, I feared that the market might get very bullish (for the short-term at least) so I decided to take profit early. Our October IB was only showing a profit $130 at the time but I decide that it would be better to take it rather than see the unrealised profits turn into a loss. We probably would have hit our profit target of $250 had we waited because the anticipated bullish run did not materialise until ten days later as shown in the chart below.

We track our monthly performance without including brokerage cost as this will vary from broker to broker. Our performance as at October 2015 is a total profit of $1094 or a 22% return on our trading capital of $5000 for this model portfolio.


After trading this iron butterfly model portfolio for 10 months, I can conclude that this trading strategy is a very robust and is probably more suitable for new traders compared to high probability iron condors. Trading losses are small even when there are large market moves such as the ones we experienced in February and September 2015. Although iron butterflies have a small profit zone, we can still achieve a high win rate by managing winning trades early (e.g. at 10% of premium collected like what we have done in this IB model portfolio).

Dave at DTR Trading has also recently completed a number of studies on straddles (which are similar to iron butterflies with undefined risk) using SPX.  His studies have also shown that managing winners and losers produces better results than simply holding the trade until expiry. While there are many winning straddle strategies, one of my favourite is the 38 DTE straddle where winners are managed at 10% and losers at 25% (see the blue line in the chart below).

 Source: DTR Trading 38 DTE straddle study

This straddle strategy had a decent win rate, good P/L and a high sortino ratio. Win rates could be increased by increasing the stop loss targets but this would increase the drawdowns for losing trades.

Our first Iron Butterfly model portfolio has been a success. We have managed to achieve the objectives set out in our Trading Plan. Although we cannot make any statistical conclusions with just 10 trades, the SPX straddle studies which were done with over 100 trades have also shown good results.

As I will be very busy with updating my website in the next few months, I would like to wrap up our first Iron Butterfly model portfolio. Do let me know if anyone has any ideas for new model portfolios in 2016.

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.

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