$RUT December 2015 Butterfly (CIB) Trade Review


Normally on the weekend, I’d write a market commentary, but the December CIB was closed on Friday and I went into the weekend flat.

The December expiration was a slightly less than ideal environment for the CIB, but it wasn’t too bad overall.  The trade was initiated when RUT was chopping around and not really going anywhere.  After sitting for a while, the market pushed higher and the trade was adjusted on the upside.

Since the market sat around prior to the move higher, the long call decayed somewhat.  That scenario made the upside more painful than usual and the trade was down almost $250 at one point.  That open loss was close to the $300 max loss per position.  Fortunately, the market reversed from that point and the trade quickly went up money.  Overall, the December trade was relatively easy to manage and didn’t require a large number of adjustments (unlike the November trade).

Even though I chose to exit the trade on Friday, the position probably could have been left running a while longer.  However, the trade was above the target profit and exiting was just following the rules.  Sometimes exiting at a target can be hard because you feel like you’re giving up potential profit, but it’s important to remember that systems are designed with long term results in mind.  In this case, the trade grossed around $385 and netted around $330, which represents a little over a 3% return on a $10k account.  If those returns can be achieved most months of the year, the results can be very impressive.



The image below shows the trade on the day of initiation, October 20th with 59 DTE.  I bought the 1090/1140/1190 December RUT Put Butterfly for 10.00 and the 116 IWM Call for 2.85.  Originally I was hoping to buy the 1150 Butterfly, but I couldn’t get a price I liked so I went with the 1140 instead.  I was able to sit in the position below for a while before doing anything.


Adjustment #1 – Add and Roll Up A Short Put:

After almost two weeks without an adjustment, the RUT broke out and started to move higher.  The late move higher put the trade under pressure.  As a result, I added the second Butterfly at 1160 and rolled up one of the short puts to keep Delta under control.  At the time, I was concerned that the RUT could move sharply higher because it had broken out of a consolidation and the SPX was already very strong.  The image below shows the position after the adjustments.


Adjustment #2 – Add Again:

Shortly after adding to the position, it became necessary to add again when the market continued higher.  The image below shows the trade shortly before RUT reached the 1200 area.  As you can see, the T+Zero line is sunken.  The reason for the sunken line is that the initial position had a long call that decayed before the move higher.  That scenario made the upside more painful than if the market had quickly moved higher after entry.  Rolling up the short put in my first adjustment helped somewhat, but there was still a little pain.


Peeling Exit #1:

Around a week before the peeling exit took place, RUT was up closer to the 1190-1200 area.  From there, the market traded down nicely.  With the move lower, I was able to close the highest Butterfly and long call to lock in a profit.  After peeling off the top part of the position, the trade was relatively safe as shown in the image below.  I only sat in this position one day and closed the position in full the next day (Friday, November 13th).


Full Close:

The image above is the last picture I have of the trade before the full close.  I peeled off part of the position on Thursday and then took the full exit on Friday.  The trade exceeded the profit target and rather than carry risk into the weekend, I decided to close the position.

The December Butterfly grossed 3.80 and net 3.38 in around 3 weeks.  That return represents around 3.3% on intended capital and the 2015 Results spreadsheet is updated.

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  • Nice trade. I like how you are not trying to be greedy to maximize the gains. It actually shows you have attained a high level of trading maturity. I know a lot of beginners are focused on making more and more profits while completely ignoring risk management and controlling their losses. As we know, these traders will eventually get run over by the market because they took a bet that did not pay off. Kudos to you sir for your consistently profitable strategy.

    • Thanks Jonathan! At times it can be hard to take off the position because you want to let it run longer, but I don’t have good guidelines for trading that yet. Sometimes it can be psychologically hard to feel like you’re leaving money on the table, but hitting your target and putting money in your pocket is also important. As I’m sure you know, thinking about missed opportunities or imaginary profit doesn’t help.

  • david

    Great trade! The CIB looks really solid. Did you had big losses trading CIB? what do you think is the worst market scenario for this strategy?

    • Hi David, thanks for the comment. No, I haven’t had a big loss trading the CIB.

      I think the worst scenario for the trade is when price stays the same for a couple of weeks and then the market makes a sustained move higher. When that happens, the long call decays and the upside is less protected. You can adjust in that situation, but you’re likely to get drawn down a bit.


      • PEP

        Hi Dan;
        First of all, your blog is perfect to learn about options trading, you’re doing a really great job here. I’m new at the options trading but I was wondering, would it be better to buy the call to protect the upside with a higher expiration time than the whole butterfly?? in that way the decay of the long call should be a little lower, I think. what do you think about it??
        thank you!!


        • Hi PEP,

          Thanks for the comment and support!

          Buying a call in the back month is something I haven’t tested or tried so I can’t recommend it.

          In all honesty, I sort of hope to lose money on the call because that usually means the Butterflies are making money. When the call is making money, it usually means the Butterflies are taking some heat. Everything is a tradeoff.

          You’re right that the back month call should theoretically decay slower. I’ll dig a little deeper and get back to you on this one. Keep an eye out for a post sometime soon.


          • PEP

            you are right Dan, if we want the butterflies to make money we always have to expect some loss in the call. Plus, the call in the back month has a bigger vega, so….maybe could be even worse…
            Thank you for your comment!! I’ll be around here keeping an eye at what’s new.

          • Edward Chin

            Vega in the back month has a bigger Vega in Option Theory only. In reality it is not! (Google – Weighted Vega.). Currently the CIB could expect a loss if the market stay put for several weeks and decides to move up during the last two week of exp. because the call lost value. On the other hand a back month call will not react as well as a front month call when the market moves up. (Again Google Weighted Vega). In options there is always a give and take. F.Y.I John Locke uses a ITM call hedge instead of an OTM call hedge on his Butterflies.

  • david

    What kind of adjustment you would use on this scenario? Rolling up? Or adding a new long to compensate delta?

    • I’d just follow the guidelines as appropriate. I’d add to the position or roll if that was recommended. Depending on the Delta, I might roll up short puts as well.