This trading plan was created on 1 January 2015 for the XJO Iron Butterfly Model Portfolio.
- To test a simple, low maintenance Iron Butterfly strategy
- To see how Iron Butterflies compare with high probability Iron Condors
- To avoid large losses in a single trade
- Sell iron butterfly with a 250 point spread width and 30-45 DTE
- Close when profit target is achieved or when unrealised loss exceeds 1.5 times profit target.
- Open iron butterfly with 30-45 DTE if IV Rank is > 25%. IV rank is calculated using the value of XVI, the 30 day implied volatility of XJO using the formula below:
IV Rank = (current XVI price – 52 week low) / (52 week high – 52 week low) x 100
- Sell at ATM strike prices and buy the wings 250 points away
- Close trade when profit target is reached. Our initial profit target is 10% of spread width which is $250 per contract for a 250 point spread. Set this up as a GTC (Good-till-cancelled) order after trade is opened.
- To avoid big losses, we will check our positions after market close daily and close our trade if unrealised loss >= 1.5 times our profit target
Risk Management rules
- Iron Butterflies are short premium trades which do well when the IV is high. Selling them when IV is low is risky, hence we will only trade if IV Rank is above 25%.
- To avoid big losses, we will close our trade if our unrealised loss is >= 1.5 times our profit target
Money Management rules
- We will allocate 50% of our capital to each trade. The margin required for 1 contract of a 250 point spread is $2,500 (250 points x $10 per contract). Hence, we will trade 1 contract for every $5000 of trading capital.
- Our capital at risk is equivalent to margin required less the premium collected e.g. if we sell a 1 contract iron butterfly for $1500, then our capital at risk is only $1000 ($2,500 – $1500).
- Calculate IV rank to determine if a trade should be opened
- Check options have at least 30 DTE