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Core Income Butterfly (CIB) Options Adjustment & Technical Analysis Video

Overview:

As is frequently the case in my trading, the market moved higher shortly after opening a position.  The February CIB trade is getting close to an upside adjustment point.  In the video below, we walk through the market environment in the Russell 2000 as it relates to the trade.  That discussion includes some longer term technical analysis with a focus on areas of consolidation and where the market seems to be trapped.  We finish up with a discussion of the adjustment for the position and where the new adjustment point will be if we get there.  Have a good holiday weekend and let me know if  you have any questions in the comments below.  Enjoy:

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  • ibon

    Hi Dan! Thankyou for the update, I think your CIB is very interesting and I am willing to know how it evolves.
    Just one question: why just 20 points separation between the Butterflies? Separating more points seems to give you more room in case the upside move continues, isn’t it?

    • Dan

      Hi ibon and thanks for the comment. Everything in options trading is a trade-off. If we place the second Butterfly closer to the money, we do get more room on the upside. The challenge is that we also end up with shorter delta so the T+Zero line dives more and it’s harder to flatten out. Note that the third add point is usually closer to the money and stretches the tent more than the second add.

      At times I’ll use a 50×40 BWB or split the short strikes to stretch out the tent more and keep the T+Zero line flatter. Those choices also come with trade-offs, namely more downside risk.

      I’m a little bullish this week and next, but I don’t think the market has a lot of room to run higher. I could certainly be wrong, but for now I’m trading with the expectation of a pull-back in a couple of weeks. My concern is that this push higher will fail and the market will come back down. If that happens, I’d rather have a more bearish position. If I’m wrong and the market moves higher, I’ll roll up.

      Hope that helps and thanks again for the comment!

      Dan

  • Thanks Dan for the video. I will be following your Feb CIB to see how it evolves. Good stuff.

    • Dan

      Thanks Jonathan! I’ve been looking at some interesting issues related to changes in put skew that I’m hoping to incorporate into the trade going forward. We’ll see how it plays out . . .