You're looking at a Put Broken Wing Butterfly strategy on the S&P 500 Index (SPX:xcbf) with a setup for the September 15, 2023 expiry.
1. Strategy: The Put Broken Wing Butterfly involves buying one in-the-money (ITM) put, selling two at-the-money (ATM) puts, and buying one out-of-the-money (OTM) put. This strategy is used when a trader believes the underlying security will remain within a certain price range until expiration, and is looking to profit from the premium decay.
As described above a broken wing butterfly has normally it's short legs (the sold puts in this case) ATM. In this case we'll put the short legs (the sold puts) a bit lower of the current/last traded price. This will give us some sort of a cushion if our bullish view is invalidated. So, as long as we stay above 4350, we're safe.
2. Trade Setup: The specific trade here involves:
- Buying one put with a strike price of 4400.
- Selling two puts with a strike price of 4350.
- Buying one put with a strike price of 4250.
3. Premium and Risk: The net premium for this setup is $2.90 per share, giving you a credit of $290. The maximum risk for this trade is $4710, which will occur if the S&P 500 moves significantly beyond the 4250 strike price at expiration. On the other hand, the maximum profit potential is $5290, which will be realized if the S&P 500 is at the short strike ($4350) at expiration.
4. Breakeven Point: The breakeven point is 4297.1, indicating that as long as the S&P 500 is above this level at expiration, the trade will at least break even.
5. Implied Volatility (IV) Rank: The IV Rank is 27.96%. This can be interpreted as the current level of implied volatility is higher than approximately 28% of its readings over the past 52 weeks.
6. Days to Expiration (DTE): The time until expiration for these options is 42 days.
The goal of this strategy is to collect the premium, while the underlying (the SPX) continues to move upward. As we collect $290,- on a €860,17- (= +/- $942) margin requirement over a period of 42 days, this yields us approx. 30.7% return in 42 days or an annualized return of around 266%.
In case the SPX goes south and opposite of what we expect it will first pass the "cushion" area (the area where we sold our puts), where it will yield it's maximum result at expiration. If it goes beyond that (= below the breakeven point) our strategy will result in loss. Depending on the time where we are we can exist early and limit our losses. If you do nothing and the price goes below the 4250 long put, this strategy will result in the maximum loss.
2. Neutral: Iron Condor
The second strategy we'll be looking at is the Iron Condor. An Iron Condor is an advanced options trading strategy that is designed to generate a consistent return with a high probability of success, when the expectation is that a stock or index will have lower volatility at/near expiration. The strategy involves four different contracts with the same expiration date but different strike prices.
Here's how it works:
1. Sell an out-of-the-money (OTM) Put: This is a short Put at a strike price below the current price of the underlying asset. You receive a premium for selling this Put.
2. Buy an OTM Put at an even lower strike price: This long Put serves as protection in case the price of the underlying asset drops significantly. You pay a premium for buying this Put, but less than what you received for selling the first Put. The difference between the strike prices of these two Puts forms the Put spread.
3. Sell an OTM Call: This is a short Call at a strike price above the current price of the underlying asset. You receive a premium for selling this Call.
4. Buy an OTM Call at an even higher strike price: This long Call serves as protection in case the price of the underlying asset rises significantly. You pay a premium for buying this Call, but less than what you received for selling the first Call. The difference between the strike prices of these two Calls forms the Call spread.
So, an Iron Condor consists of two vertical spreads: a Put spread (for downside protection) and a Call spread (for upside protection), both for the same underlying asset and with the same expiration date.
The maximum profit for an Iron Condor is the total premium received for selling the Call and Put spreads (minus commissions). This occurs if the price of the underlying asset is between the strike prices of the short Call and short Put at expiration.
The maximum risk or loss is the difference between the strike prices of either the Calls or the Puts (they should be the same) minus the net premium received.
Iron Condor trades are a good way to generate income in a non-volatile market, but they also require careful management due to the potential for significant losses if the price of the underlying asset moves too much in either direction.
Now let's have a look at an actual setup: