The Butterfly Effect

#1

I am new to APEX but have been trading butterflies on the 20-min NADEX indexes for some time. With this in mind I thought I would put out some ideas on how I try to identify them. The idea is to use the opposite of the Trend Catcher Rules to find opportunities. This trade works in slow markets, lunch hour, Friday afternoons and holiday weeks when the professionals are away.

I have attached a chart that illustrates the concept. Looking at the Bar Timer you will see bars taking 2 min and spiking to 3 min to form (also the 20-min time boxes are very narrow with only 3 of 4 candles in them). Secondly Volume is declining and way below the expected line (volume = movement so no volume = no movement). Third, Trend Catcher is firing off trades in the opposite direction of the APEX Indicator and giving multiple cyan arrows without a confirming arrow. Fourth, price is oscillating between 2 standard deviation levels (often between settlement and ± 0.5 or just around the Settlement line) indicating little market movement.

To enter the trade: It is best to enter as early in the 20-min time frame as possible, rarely w/ less than 15-min remaining. This will give the widest possible spread and still produce reasonable results. You buy an ITM strike below recent support and sell an ITM strike above recent resistance. You want $15 to 20 profit potential on each leg. Selecting the strikes is critical. If you are not sure go further out. I like to be 3 or more strikes apart. It is OK to leg into the position, entering first in the direction of the TC red/green arrow then entering the other side after confirming the market is stalled, just don’t wait too long.

For maximum profit, I hold to expiration however if Actual Volume spikes above Expected Volume or Bar Velocity spikes yellow or red exit the losing side of the trade. This indicates a change in the market (news, etc.). The pattern ends if price breaks the recent deviation band. Also, this trade will sometimes peter out over repeated time frames. Market makers are not stupid and will tighten up the range of active strikes after repeated stalled periods making it more and more difficult to get a good entry.

Comments and suggestions appreciated.

Good luck and good trading.

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#2

Very good post, clear and easy to understand.

#3

Good post :slight_smile:

Note the markwr makers have no impact on strikes. They are always defined per the contract specs.

Another tip is look for expected tange to shrink from the last range so yoi dont have to wait on holidays Fridays etc.

Legging in helps a lot.

Using tc to help when legging into the itm side is great idea!

#4

Thanks for the kind words guys. I realize NADEX establishes the strikes, what I was trying to say is that the market makers seem to become less active in slow markets, particularly at strikes several levels above & below price. Instead of being able to get in for a $20 profit on each leg, it drops to $5 or less (some strikes have no price at all) making it not worth the risk. It seems to become much more noticeable when a market remains flat thru numerous 20-min cycles. This is only normal, after all they are not there to hand out twenty dollar bills {:wink: If you try to enter a strike to close to the price because it is the only price worth the risk, you will have your head handed to you.

#5

Lower iv results in lower prices higher iv higher prices. Its how all options work. The edge is finding high iv times with lower expected volume for 20 min iron butterfly trades. Or low iv times with higher than expected volume for strangles.