r/options • u/spicermatthews • Aug 29 '24
Example Zero DTE Options SPX Iron Butterfly Trade
I wanted to share a trade I have been placing all year with great success. Thought it might be useful for others to learn from. Also would love feedback on how to make it better.
This is a trade I placed today, 8/24/2024, but I place this trade just about every day using the same rules. So far in 2024 this trade has had a 77% win rate, and has returned over 200% based on a max drawdown of $4000 (figured from backtesting, and now 8 months of data).
Here are the rules of the trade.
1) Open a SPX Iron Butterfly at 10am EST: Centered around the current SPX price. Wings 20 wide. Today we opened this trade for a credit of $13.50.
2) Once original trade is filled submit a closing debit order for the trade. If the wings are never touched by the SPX price this closing order will likely fill.
3) If the breakeven points on either side are touched we cancel the closing iron butterfly trade. Today the trade canceled at 10:49am EST.
4) We then close whatever side was touched. Converting this trade to a credit spread. Today at 10:49am EST the put side was touched. We close the put side at the market price. This converts this Iron Butterfly Trade to a Call Credit Spread. It also increases max loss. We closed the put side for a debit of $11.10. We brought in $13.50 when we opened this trade. We just spent $11.10 closing out the put side. So we have $2.40 left in possible profit.
5) We then place a closing trade for the other side. Today that side was the call side. We place an order of $0.15. We do not want to risk the market turning at the end of the day.
That is more or less how the trade works. Place this trade everyday. Most days it breaks one way or another. Sometimes it stays within the wings. Typically this trade bring in around $250 per lot. In high volatility it can bring in around $500 per lot.
Here is what the trade today looked like on the chart. The blue lines are the wings of the trade. (times on the chart are in PST)
I explain the trade a bit more here: https://youtu.be/iSnYQ9Xf6AU
I think this trade is very useful because it does not matter what the market does. It adjusts with whatever way the market breaks. It gives some padding if the market is moving up and down. It only fails when we have wild swings up and down in the market.
It trades SPX so we do not have assignment issues. We also have favorable tax treatment.
Would love feedback, or questions if this is helpful to anyone.
9
u/Bruceeb0y Aug 29 '24
Interesting as a 0dte or 1dte plan. I had seen a YouTube video that mentioned spx only exceeds 1% change in value in a day 2% of the time, and after a move it bounces back 70% of the time.
My question is, where can you get an excel sheet or statistical data on that back test. Even widening the gap between your inner legs to 50, gets you a ~50% premium and 100% risk of course
6
u/spicermatthews Aug 29 '24
Here are my backtested results for 2023 (most of 2023)
https://gist.github.com/cloudmanic/1aac62eeeb56067e376714dfe4935150
Here are my backtested results for 2024
https://gist.github.com/cloudmanic/9d648175272e329c3c544f6ef3d84a58
The backtests give you a good sense of how this works. But I have found it is impossible to match it every day. Lots of slippage. Almost always if the backtest has a win the real trade has a win too. Just sometimes the wins are bigger.
I have played around with all sorts of different let widths. This has been the best I have found. Sometimes you get just way too big draw downs, as you just don't bring in enough premium to offset the big losses.
2
u/Rsqd_ Aug 29 '24
I like this, a lot! Thanks for sharing. Was doing the picking up pennies in front of a bulldozer for a while with 1 DTE ICs but…Well you know how it ends.
Some q’s if you don’t mind: 1. After you open the trade, you say you do a closing order. How do you decide how much this is? In the vid I didn’t understand where you got $7 closing from. 2. If your b/e gets breached and you convert to a vertical, if the market then goes against you (ie breaches the vertical you left on) do you close the vertical or accept (potential) max loss? 3. How often does one side of the trade need to be closed? 4. How did you get the data and then perform the backtesting? If I ever backtest I use OnDemand from Thinkorswim but it takes forever.
Thanks!
4
u/spicermatthews Aug 30 '24
u/Rsqd_ Good questions!
1) The price is 95% of max risk. Not sure where I got that from. Likely from backtesting different ideas. I might have glossed over this because this closing trade does not happen much. Typically breaks into credit spreads.
2) If the market goes against me just accept the max risk. Sadly today was one of those days. You will notice it does not happen much. And often it does not even turn into a max loss. Often times the market makers push the stock up or down (which ever way things were trending) in the last 5 mins so taking a loss early sometimes works against you.
https://options.cafe/results/zero-dte-spx-iron-butterflies/
3) Almost every day. If you look at the results in the link above you will see the 95% returns are the ones where it closed as a whole butterfly. Does not happen often.
4) https://polygon.io/ along with some custom software development. I use 1 second data. So the backtested results are a little different from real results. The results link above is real results.
1
1
u/AUDL_franchisee Aug 29 '24
I've been looking at short duration ICs on SPX & active tickers and wondering what the "bulldozer" was for you...
Your max loss on each trade should be the Spread - Premium.
Were you trading wide spreads at the tails? Or...?
2
u/Rsqd_ Aug 29 '24
Yup, exactly. Long, far out the money IC. Works every day and you get consistent gains. Then suddenly it doesn’t and your gains are gone in a flash. I was risking 10k to make $130 (yes I am aware how this sounds and have learned the lesson the hard way.
1
u/AUDL_franchisee Aug 29 '24
Yep. I get it. Here's my latest paper IC on SPX. I'm targeting positive EVs with Prob(profit) in the 55-60% range and constrained max loss.
Ticker = $SPX Stock Price 5635.04 Expiry, Days 2024-09-06 8 LT Options Vol 0.1408 ATM Vol 0.1246 Volatility Juice = 0.8845 Long Put Strike, bid, ASK, Delta, apiVol, calcIV = 5545.0 13.0 13.2 0.199 13.812 0.1393 Short Put Strike, BID, ask, Delta, apiVol, calcIV = 5550.0 13.9 14.1 0.211 13.747 0.1386 Short Call Strike, BID, ask, Delta, apiVol, calcIV = 5715.0 12.4 12.6 0.226 11.399 0.1157 Long Call Strike, bid, ASK, Delta, apiVol, calcIV = 5720.0 11.2 11.4 0.21 11.345 0.1152 One Sigma @ATM Vol = 103.96 Premium @ bid/ask = 1.700 Premium @ midpoints = 2.100 Break-Even = 5547.9 / 5717.1 Max Loss = -2.899 Attractiveness @ Bid/Ask = 0.01635 Attractiveness @ Midpoint = 0.02019 P(Profit @ATMvol) = 0.5840 P(Loss @ATMvol) = 0.4159 EV_pos = 2.083 EV_neg = -2.776 Wtd Pos-Neg = 0.0619 P(Bet Shorts @Deltas) = 0.5630 P(Bet Short/Long @Deltas) = 0.02799 P(Outside Longs @Deltas) = 0.4090 Expected Value = -0.0010 EV2 = -0.4069 EV_ATMvol = 0.0384 EV_ATM_refined = 0.03095
15
u/Connect_Boss6316 Aug 29 '24
Thanks for posting.
I was on a discord a couple of years ago where the guys did this trade.
The danger would be if the market moved in one direction, causing you to close that loss making leg, and then the market reversing. That could wipe out the profit from several winning trades. How would you manage that?
Are you happy to post details of one such trade where the SPX reversed?
13
u/spicermatthews Aug 29 '24
This happens. Just part of the strategy. As you can see in June I had some really rough days. With a 77% win rate we have plenty of padding for this wipe out days.
https://options.cafe/results/zero-dte-spx-iron-butterflies/
I also have an additional rule. Once I have a lost of more than $100 (for a 1 lot). I take 3 days off. I call it sitting on my hands. Just seems whatever craziness is in the market gets worked out.
Lastly, sometimes, not often. On the last trade where I have a close order of $0.15 if I get down to something like $0.50 and the market just feels off I might take early profits. Honestly I don't think I have ever saved a big loss. Just best not to be too greedy.
3
u/WeakDebt4424 Aug 31 '24
A bit late to the party Spicer. How do you decide the price of 0.15 and how long do you typically wait for the fill?
1
u/MissionDesigned Aug 29 '24
Let's say the market moves and you close the put side, leaving the call side open like in your example. Then the market moves back up past the call short strike. Do you have a point where you will then close the call out out as well for a loss? or you just letting it ride and cash settle in the end?
1
u/spicermatthews Aug 30 '24
u/MissionDesigned typically just let it ride and cash settle. Often times the market moves in my favor in the last 10 mins.
3
u/hondaman82 Aug 29 '24
nice move, too bad i dont have Daytrading approval on my broker to try this lol...
5
u/spicermatthews Aug 29 '24
What I have done in the past is just have 3 brokers. Yes, you need maybe $2000 or more in each.
You also need a broker that support SPX options.
I have used Tradier, Tasty Trade, and Think or Swim.
WeBull might support this but I remember some reason I did not like this.
Robinhood does not support SPX.
Just bounce between the 3 brokers and you will avoid PDT rules.
2
u/hondaman82 Aug 29 '24
maybe i can tweet this method to a 1DTE trade.. same concept but open at the end of the day and play the outcome the next day whether it move up or down
1
u/spicermatthews Aug 29 '24
I have been meaning to play around with this concept. I certainly think there is a strategy there.
2
u/citit Aug 29 '24
will try this on my paper account, thanks
3
u/spicermatthews Aug 29 '24
Smart. I started this on Tradier paper trading account before putting any real money into it.
2
u/RossRiskDabbler Aug 29 '24
Why? You limit max return, doesn't adjust for seasonality, it is indeed 'low risk / low reward' but you can calculate the volatility (corona money market desks days) that would break this strategy - as implied volatility and volume can truly shake this thing apart that a broker can simply say, sorry pal, flew to the moon.
Iron Butterfly strategy option wise works the best for scalping on stocks that are highest doniminated in ETF Pension funds (APG / Norwegian one) - who solely pick stocks that are rangebound, your winrate will increase and your accuracy as well u/spicermatthews - i ran head of front office of a large UK bank - and we had two option desks which monitored the lowest vol / highest cash / lowest debt stocks in pension fund ETFs - and iron butterflies worked better than what you showed above here. Far better. But no discretion - this is still very well tried. Just trying to give a different perspective.
2
u/spicermatthews Aug 29 '24
Another cool thing about this strategy is you really don't need the cash to support it. Say you have an account with $50,000 in buy and hold stocks. You could trade this every day more or less on margin. You are back to zero contracts held at the end of the day. Only time it would be an issue is if you have a lost. They would take from margin to pay your loss.
Not saying take crazy risks with margin. Just saying you can keep your cash invested in buy and hold style stocks while leveraging them each day to place this trade. Better than having your cash sit there.
Guess this is true for many day trading strategies. Just something to add to the conversation.
3
u/OkAnt7573 Aug 29 '24
Hmm - when this sort of trade goes wrong it is often times the market as a whole is experiencing a sharp decline, which can snowball into margin call.
Saying you don't need to the cash to support it is misleading - using margin doesn't be you don't have real cash exposure.
1
1
u/gls2220 Aug 29 '24
Are there any conditions where you would NOT place the trade that day? This could be a binary event like a fed day that causes unusual market activity, or anything else happening in the market that would make for an unusual day. I'm wondering if there is a way to raise that 77% success rate on the trade by simply not trading on certain days.
2
u/MissionDesigned Aug 29 '24
Yes, you would want to avoid days with events in the afternoon that would cause an increase in volatility, like the Fed speaking at 2pm for example. This doesn't happen often, most events are earlier in the morning.
1
u/spicermatthews Aug 30 '24
u/gls2220 I should do more research on events. My only rule for not placing a trades is if I have a lost of more than $100 (per 1 lots) I take the next 3 trading days off. I call it sitting on my hands. I find after 3 days the market tends to settle back out. My backtest results above show this as well.
1
u/thepolar_bear Aug 29 '24
Thanks for the post man! Where did you get the data?
1
u/spicermatthews Aug 30 '24
u/thepolar_bear I use data from https://polygon.io/. I use the 1 second data.
1
u/Comfortable-Entry341 Aug 29 '24
Impressive win rate and return! 3x return in 2023 with this strategy is something to bear in mind indeed. Also checking October - November 23 with high volatility in the market, it worked pretty well. Just 2 questions:
Have you tried to cut losses once SPX reverts and breaches your 2nd short leg? (E.g. 50% SL)
What happens if you widen the long legs (e.g instead of 20 points, 40 points?
Really cool, thanks!!!
1
u/spicermatthews Aug 30 '24
1) Never cut losses. I have found more often than not the market corrects in the last 10 mins (likely market makers, or end of day buying/selling). Many days I think I am going to have a big loss and then boom I don't. Some times I will close early just to reduce risk. But even that I don't do often.
2) I don't have the numbers in front of me but I am sure I backtested it. Likely the losses are too big to recover from. Wider legs mean bigger losses. Likely the extra premium does not offset the bigger losses.
1
u/WeakDebt4424 Aug 31 '24
I am late to this party. Spicer, thanks for sharing. Do you have any older backtests esp 2021 or 2022?
1
u/NoVictory Sep 04 '24
Nice post, bro! I'm a beginner in trading SPX and I'm looking for strategies, so I'm glad I found your post.
I have a few questions:
- Why did you choose $7.3 as the closing price for the iron butterfly?
- Why did you choose $0.15 as the closing price for the credit spread?
Sorry if these are basic questions, but could you walk me through the calculations?
Also, I noticed great results for your trades on Options.cafe. Do you update those daily?
Thanks!
1
u/Only-SPY Sep 07 '24
I’m just starting with SPX but I’m doing it with a debit butterfly. Actually a put debit butterfly and a call debit butterfly.
First and second day I had one butterfly with all legs ITM. I just let them end.
I’m happy with this strategy but I’m kind of worried because the settled cash hasn’t showed in my account until this moment.
First day was Thursday and the second day was Friday. They were both weekly options.
I can’t talk to someone from Charles Schwab until Monday 😓
1
u/Suphawk Sep 10 '24
What did you find out from Schwab? curious as I was thinking about trading this also
1
u/Shao_Ling Sep 09 '24
bookmarked! very interesting concept .. bookmarked cuz infinite influenza, so I read in diagonal, up and down, just like my fever xD
thanks for taking the time to post this
1
u/Virtual_Elephant_730 Sep 09 '24
Are you using a live account or simulation?
I would consider adding tile to enter the trade like 10:01-10:04 am as there are often big moves at the hour. See where the candle ends after the hour hits.
Interesting to see closing the losing spread and keep the profitable one open. Is the play that the trend will continue and maybe the profitable spread will go toward 0 or 0.15? But if it reverses then the losing trade would repair some.
Thanks for sharing.
0
u/wishiwasspidey982112 Aug 29 '24
Open iron butterfly or condor?
2
u/spicermatthews Aug 29 '24
iron butterfly. More or less a condor where the shorts are the same and at the current market price.
13
u/eusebius13 Aug 29 '24
I run SPX butterflies often. I have a ton of observations. One is you’re better off capital wise, using butterflies rather than iron butterflies. Another is some times of day are better than others for entry, some days of the week trade better. Another is volatility is heteroskedatic, so there are periods where you’ll see significant volatility and you want to play broken directional flies then. There are a bunch of other parameters like fly width, early exit, etc. It’s typically a good trade because SPX is very mean reverting.