SPX 17 Day Broken Wing Butterfly
This is a neutral options trading strategy (range bound spread), that takes the concept of a balanced butterfly, and adjusts it to get your Delta as neutral as possible. Currently, if you put a normal balanced butterfly on the SPX, your upside risk is substantially more than your downside, essentially making it a bearish directional spread.
Sometimes I will use the acronym BWB which just means “Broken Wing Butterfly”.
We mainly do high probability, neutral, range-bound spreads here at Calm Hedge. We are not here to speculate on direction, but instead to manage risk and capitalize on history repeating itself.
The SPX 17 Day Broken Wing Butterfly is created simply by taking a balanced butterfly and extending the downside leg an extra 10 points.
If you want to learn more about the options butterfly spread or need a refresher, here is a great article.
If you have further questions after reading this, feel free to reach out to me on Twitter @calmhedge. I do not normally respond to DM’s but you can reply to any of my tweets and start a thread.
Considerations:
The VIX. If the VIX is above or around 17, I will put this trade on. If the VIX is below 16 or 17 I will most likely be looking at setting up a 15 Day Calendar Spread on the SPX.
Trend. Are we blasting off in either direction? Making multiple day 1% moves or more? Are we gapping all over the place? If so I would hold off on this trade.
The Spread:
On the SPX
Buy +1 60 Points to the Downside
Sell -2 ATM Call (At The Money)
Buy +1 50 Points to the Upside
Here is a real-world example:
Let’s say the current Date is: 11/11/2021
The SPX is trading at 4660
Around the end of the trading day, (around 11 – 12 PST), initiate the broken wing butterfly:
The spread would be as follows:
+1 28 NOV 21 4600 Call
-2 28 NOV 21 4660 Call
+1 28 NOV 21 4710 Call
Profit Target = 10% of your risked capital
Stop Loss = 15% of your risked capital
How to put it on:
I usually wait until the last 1 – 2 hours of the trading day to put on this spread. Never put this on during the open. I use the Think Or Swim platform, the easiest way is to just open up the options chain you want, right-click and hit Buy > Butterfly, and then analyze it to bring it up in your analyze tab. For our example above, this is what it would look like:
Once you have it set up correctly, you can initiate the trade by right-clicking it and hitting “Confirm and Send”. Again, Make sure your short Strike Price is as close to the money as possible. You want to have the short of the spread right where the underlying currently is. Try not to give up more than 5 or 10 cents to get your order filled. I also like to create “Groups” on my Monitor tab in Think or Swim to house my spreads and keep them separate from each other. You can learn more about groups HERE.
Adjustments:
Initial adjustment points must be established directly after putting the trade on. Normally you would want to adjust when you are 1 point past your “break-even” points, that being, where your profit arc meets your triangle.
This is a neutral options strategy, meaning we want to generally stay within a certain range and not go too far in either direction. If the SPX is relentlessly running in a direction, then we will often “Adjust” the position for further protection. This can be done to the upside or the downside. In this particular spread, it is relatively simple, but it does require some amount of critical thought and “feel”.
To do this we set “Adjustment Points” on our spread when we originally open it. Generally, your adjustment points are around 40 – 45 points to the upside or the downside. You can see on the graph it is always where the profit line meets the spread. See below for an example:
Adjustments can wait until the last 30 – 60 minutes of the trading day. This is done in case the market turns around back in your favor. HOWEVER, if the market goes 5 – 10 points past your adjustment area, then you would want to consider adjusting then and there. Use common sense and do not let the market run away from you.
Downside Adjustment:
This is the simpler side of adjusting this spread. All you need to do is open a new Broken Wing Butterfly, on the same options chain (same expiration), with your short (midpoint), 30 points down from where your adjustment point is. Easy enough right? Let’s look at an example.
Let’s say I have this spread on:
+1 28 NOV 21 4600 Call
-2 28 NOV 21 4660 Call
+1 28 NOV 21 4710 Call
My adjustment point to the downside is 4620. Subtract 30 points from there, and that is the short (midpoint) of your adjustment BWB. So the short of my adjustment BWB will be 4590. The BWB will be set up the same at the original spread in regards to the width of the upside and downside. 60 points to the downside, 50 points to the upside. The adjustment BWB would be:
+1 28 NOV 21 4530 Call
-2 28 NOV 21 4590 Call
+1 28 NOV 21 4640 Call
You can do this in Think or Swim just like you did when you opened the original spread. Here is what it would look like:
Here is what it looks like on the graph:
Remember, same expiration, same options chain, the same amount of contracts, but have it 30 points from your “Adjustment Point”. This simply provides us some extra protection to help ensure we walk away at a profit. Do we hope every single trade goes perfect and we are never in a situation where we are thinking about adjusting? Yes. Unfortunately, this does not always happen.
NOTE: Adjusting this trade increases your capital risked, sometimes doubling it or more. When I make an adjustment, I often set a new profit target and stop loss of 6% – 8% of the new amount of risked capital.
Upside Adjustments:
Now, this is where things get interesting. You can adjust to the upside exactly how you adjusted to the downside with another Broken Wing Butterfly. However, if we are looking at adjusting to the upside it is pretty likely that the VIX is crashing down. What do we like in a low VIX environment on the SPX here at Calm Hedge? Calendar spreads!
So how do I know which one to use? Well, generally you need to use some critical thinking and “feel”. But if you want to set a hard and fast rule, let’s say:
If we are adjusting to the upside, and the VIX is below 18, then let’s adjust with a Calendar Spread. If we are adjusting to the upside, and the VIX is above 18, let’s adjust with another BWB.
Calendar Upside Adjustment:
With a Calendar upside adjustment, you want your short of the Calendar to be the same expiration (options chain) as your Broken Wing Butterfly. Your long should be 5 days further out. The number of contracts you need to use on the Calendar should be the same as your short of the BWB, meaning you need 2 Calendars for each leg of the BWB.
The strike price of your Calendar should be 30 points up from your adjustment point. In this case, our adjustment point is 4700, so our strike for the Calendar would be 4730.
Here is what it would look like:
Here is what it looks like on the graph:
Easy enough right? When adjusting this spread to the upside, you may at times want to adjust early. If I am down a lot of money, and my normal adjustment point is looking like I will be already down almost 10% of my capital risked, then I will adjust 5 – 10 points early. This again comes back to using critical thinking and feel. Now let’s look at the adjustment to the upside using another Broken Wing Butterfly.
Broken Wing Butterfly Upside Adjustment:
All you need to do is open a new Broken Wing Butterfly, on the same options chain (same expiration), with your short (midpoint), 30 points up from where your adjustment point is.
Let’s say I have this spread on:
+1 28 NOV 21 4600 Call
-2 28 NOV 21 4660 Call
+1 28 NOV 21 4710 Call
My adjustment point to the upside is 4700. Add 30 points from there, and that is the short (midpoint) of your adjustment BWB. So the short of my adjustment BWB will be 4730. The BWB will be set up the same at the original spread in regards to the width of the upside and downside. 60 points to the downside, 50 points to the upside. The adjustment BWB would be:
+1 28 NOV 21 4670 Call
-2 28 NOV 21 4730 Call
+1 28 NOV 21 4780 Call
You can do this in Think or Swim just like you did when you opened the original spread. Here is what it would look like:
Here is what it looks like on the graph:
Easy enough right? When adjusting this spread to the upside, you may at times want to adjust early. If I am down a lot of money, and my normal adjustment point is looking like I will be already down almost 10% of my capital risked, then I will adjust 5 – 10 points early. This again comes back to using critical thinking and feel.
Multiple Adjustments:
In the case that things are swinging like crazy, and you haven’t taken your position off yet, you will need to make multiple adjustments. This is very simple so don’t overthink it. Say for example you adjust to the upside, then before you get your exit, the market blasts right back down. If you reach the strike or “MidPoint” of your original spread (the one that lives on the downside), take off the upside spread adjustment. That’s it. You are now sitting with a single un-adjusted BWB spread again and all the same rules apply. If you wanted to, you could just keep adjusting over and over and over until you get your exit. In this scenario, if this happens and you don’t take the upside spread off, and the SPX keeps going down, you will not last long as your upside spread will lose significant value.
The same rules apply to the opposite scenario.
When you make an adjustment, make sure to allocate it into the group where your original spread is located, this will help keep things organized. When you exit, you will have to exit the original spread and the adjustment separately. Just pop them both off in quick succession. The way I like to do it is to open up the analyze tab, right-click each spread and click “Analyze Opposite Order” and get them both displayed on my screen. Then you can just unlock the price on your exit spreads and shoot the orders off when you reach your Target or Stop Loss. If you have your own way of doing it, that is fine as well!
Other Considerations
Exits:
Sometimes you will hit +5% – +6% or more in a day or so and it is very tempting to exit your position and take money off the table. While you could do this, you must think about the implications. If you are exiting early to take small profits on all your spreads, but holding it to -10% or -15% when taking a loss, that math is not going to work too well for you over time. This is a high probability spread, and very robust when it comes to adjustments and hitting profit targets, but you are not going to win them all. So if you are going to exit early all the time and take quick profits, make sure you are cutting your losers early as well.
My advice is to follow the system.
Adjustments:
Remember when you are making an initial adjustment you are adding significant capital to your spread. You are also taking capital off when doing multiple adjustments, sometimes with losses. Keep track of everything. Adjusting this trade increases your capital risked, sometimes doubling it or more. When I make an adjustment, I often set a new profit target and stop loss of 6% – 8% of the new amount of risked capital.
Managing the trade:
I prefer to stick to my system of 10% Profit Target and 10% – 15% Stop Loss. That being said, everyone is different and has their own risk tolerance and how they view their own personal theory of risk management. I can only speak on what has consistently worked for me over long periods of time. I would suggest you to do your own research so you can choose what is best for you and your risk tolerance.
The reality of the market is that gaps exist, and black swan events exist. No one can escape them. This is why risk management and capital allocation is so important. Don’t put all of your eggs in one basket, and be mindful of your stop loss.
Questions?
If you have further questions after reading this, feel free to reach out to me on Twitter @calmhedge. I do not normally respond to DM’s but you can reply to any of my tweets and start a thread.