Iron Butterfly Strangle Combination News Trade

#1

Darrel,

Have you ever tried to do this? I did this last night on the AUD news which was a big mover.

The news was released at 9:30 shortly before while IV was high I first set up an Iron Butterfly by purchasing a 3am .9320 contract for $78 and selling a 3am .9380 contract for $22 so max risk on this part of the trade was roughly $56 should the trade expire outside the range and max profit if expired inside the range would be roughly $44.

Then I also set up a strangle using binaries because they were forecasting a low number so i felt this could move a lot - I bought a 10pm exp contract for $9.50 at a price level very close to the price I sold the upper boundary of my butterfly and also sold a 10pm exp contract for $90.50 near the lower boundary of my butterfly. so max risk here was about $20

Well the news came out and it was a big move to the downside, so i was able to make $90 on the contract i sold in my strangle and obviously lost the $9.50 on the other side so total profit on the strangle was $80.50 - as for the Iron butterfly i only got one side as the price stood below the range cause it went down so far so I lost $56.

All said and done the it was a $24 profit.

Now if the price returned to the range by 3am it would have been $134 profit.

Additionally of the news was a bust and price just went sideways I would have only lost about $20 on the strangle and made $44 on the Iron Butterfly so it still would have been a profitable trade making $24.

If you can get this trade setup like this I really don’t see a way to lose, do you? You can also do more contract to obvisly to beef up the profit, I would say the only downside is that you need some capital to do the trade, with doing one contract on each leg of this setup you need about $176, I also suggest you monitor the trade to close that one side of the strangle if it does not reach your take profit order you should have in place.

if you think the move is going to be big on the release you can also beef up the strangle and use two contract bringing the total cost of the strangle to $40 and if the news is a bust and price stays in the range then you still make $4

Please let me know your thougts on this.

I did this because I have been having a hard time finding anything good to do an iron condor with, the best im finding is like $3 to $5 a side, not very good.

Diagram attached, this may sound confusing lol[attach]207[/attach]

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#2

What if you lost both? There are no risk free strategies. It would be called winning not trading

#3

I have done these before. I felt like the risk to reward was not ideal. You can win many, but if you expire in that small zone between your OTM and your butterfly you wipe out several profitable trades. That being said, I tried these before before we had the expected ranges plotting in the toolkits. There may be a way to configure these in a combination of expirations, legging in and profit targets that may make these profitable over time. Would be interesting to experiment with. :slight_smile:

#4

Apex Allen - not sure what you mean by lose both, there are essentially 4 sides to the trade?? in addition this is pretty darn close to risk free if done correctly I don’t think you understand what I’m saying. biggest mistake that could be made is setting it up with too much room between the strangle and the iron butterfly boundaries in addition to not taking your profits when price gets above your strangle level, if it stays below it the whole time your fine because its will finish in your iron butterfly and if your doing just equal amounts of contract on all legs you will still profit - example you would make $50 on the iron butterfly and lose 10 on each side of the strangle so a $30 profit. and you had an opportunity to really profit of the price went far enough up to take profit on the strangle and the have price return to the range of the iron butterfly. so you just trying to set yourself up with the opportunity in a pretty safe way.:o

Ronin - yeah if expires there that could be an issue but you can have a ticket ready to close the position on that side of the strangle so if you bought it for 10 you can close it for at least 40 or 50, you want more if possible but that would be ok, in addition you have to choose strikes that are very close together for this strategy in other words the top and bottom of your strangle needs to be within a few ticks of the upper and lower boundaries of your iron butterfly, the whole point of this strategy is to be able to profit from a big mover with a strangle, when I used to do strangles a lot looking for a big move many times the news would be a bust - price would move sideways and you would lose everything on a strangle but in this case you would profit on iron butterfly so your loses on the strangle would be covered, like for the example of the AUD trade I got those binaries on the strangle cheap at 10 this is essential you don’t want to pay more than 12, now if i have had 10 contracts that would have been a 900$ on the side of the strangle because the option expired with price beyond the level of that side of the strangle and a $90 loss on the other side in addition to a loss on the butterfly of $50 (if only one contract was used on each side of the butterfly, i would suggest doing a few more contracts if you do 10 on each side of the strangle) so the whole trade would be a profit of $760 if the price came back to the middle of the butterfly it would be a $810 profit.

The only way to really have an issue with this trade setup is if the news breaks and gets up past near or past you strangle and you don’t take profit and the price then moves sideways and finishes outside your butterfly but this is why you set the strike very close together, it makes it very hard for that to happen, also by choosing the a short exp for the strangle it allows you find strikes in between those of the longer expires which are 20 ticks wide additionally the shorter term exp allows the option price to move rapidly when the news comes out so you get a quick increase in value and you lock in the profit on the leg pretty quick if you want. as for the longer exp on the iron butterfly i like this because its gives the price more time to return to the center which would maximize you gain on the trade.

Also you mention risk to reward, anytime you have premium collection strategy in place like the iron butterfly your risk reward is out of wack, that is because there is a high percentage of price falling between a 60 point spread.

thanks for your feedback.

#5

You are assuming if you lose the strangle the iron butterfly has to win but they have different expirations so you can lose both

#6

why are ya stranglin the BF or Iron Condor? A hedge?

#7

I copied and pasted this from above:

the whole point of this strategy is to be able to profit from a big mover with a strangle, when I used to do strangles a lot looking for a big move many times the news would be a bust - price would move sideways and you would lose everything on a strangle but in this case you would profit on iron butterfly so your loses on the strangle would be covered

On the two most recent new trades I was able to make 85$ - 90$ on one side of the strangle with a about a $10 investment, unfortunately the price did not return to the range of the butterfly so it was a lose of about $50 on that but still a profit of about $30 or $40, however if the price did return it would have been about a $130 gain with deduction of the other side of strangle which lost.

#8

I have covered this on webinars before. It is a strangled butterfly. Though I ususally do it on 2 currency pairs. One that does not move much and one that moves more. This is a calendar/horizontal strangled butterfly. If the market moved up enough for the iron butterfly to lose but not enough to make much of a profit on the strangle you could lose. if it moves out of the range you closed the butterfly and then came back in the range on the longer dates strangle you could lose. ie you co uld lose 56 on the butterfly and be down 9.50 on one side and up about $35 on the other side being down about $70 up $35 down about $40 on the trade.

You can also try doing a strangled condor

or

a straddled butterfly

There is a lot of ways to combine them.

On many news announcements i just look for spike strikers if there is no premium there for condors. Condors are more likely to be filled if there is ha higher Implied volatility in the market.

Overall though a nice trade. Just have to watch out for the ones that get you as you do in all trading - kudos for playing with the options.

what time did you enter the iron butterfly

What time did you enter the strangle?

Did you leg in or enter both sides of each strategy at the same time?

#9

As I mentioned in a previous post I have been toying around with combining the Binary Strangle and the Iron Butterfly to give myself a chance to profit off a big spike, well the one I did two this week on the EUR/USD moved alot and returned inside the iron butterfly (see more details and pic below) and I did one on the GBP/USD today which went no place and ended inside the Iron Butterlfy (See pic below).

EUR/USD News Trade (Perfect Play-Out!!:

I entered all four parts of this trade about 15 min before the news was releases, the totally awesome part about this trade was I actually able to get the strangle slightly inside the butterfly thanks to these 5 point wide strikes they have on certain pairs like the EUR/USD. So I set the expiry on the strangle for 1/2 after news came out so a quick expiry!! and I got it for dirt cheap $6.50 so I did 2 contracts on each side of the strangle since it was so cheap, well the news spiked hard and I was able to sell the upper binary on the strangle for $96 so that is $96 x 2 = $192 - the other side which lost so - $13 = $179 on the stangle:o

On the Iron Butterfly part I had to go out to 3am to get the pricing I was looking for (buy lower for $75 sell upper $25) and this worked out great as price came back down and expired in the range giving me an additional profit of $50. Oh only did 1 contract on each side of this.

So in total this trade paid off to the tune of $229:p

If the IB did not workout I still would have made $129 - Not bad!!

GBP/USD News Trade No spike Still Profitable:

This trade was not as good of a setup as the EUR/USD trade above but it still was profitable, the news was a bust and did not really go anywhere, no spike anyway so the strangle was a lose, additionally I was only able to do 1 contract on each side of the strangle because pricing was not great and on this pair they do not have the 5 tick wide strikes like on EUR/USD, I got each side of the strangle for like $13 and $15 so as I mention this was a loss of $28

As for the Iron Butterfly it was profitable as the price expired in the range, I chose the 3pm exp as that’s as far out as I could have gone since this was a Friday trade (Fridays may not be the best days for this setup as I like to put a further expiry on these things and Fridays kinda cut ya short, however it worked out in this case. So I sold the top side for $30 and bought the bottom for $79 - the IB was a profit of $51.

Overall I lost $28 on the strangle and gained $51 on the IB so on a busted news release I made $23

Again I entered all 4 parts of this trade at the same time about 15 min before the release.

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#10

Hey Darrell,

Entered all four parts of the trade 15 min before release.

Thanks to you I know what a strange and Iron Butterfly are:o

-Rich

#11

Nice job Rich! Saw your post about the GBP trade too. THat was a good one. congrats. just something to think about. maybe enter the BF earlier so it can be nice and wide plus get the extra $ from time and implied volatility that is priced in and strangle/Straddle 15 mins out. you may find that you can have a nice profit on the BF (usually not full profit) at 10-15 til news. you could then get risk off the table and book some profits that would pay for the strangle plus a lil left over…

#12

Yogirich

Thanks for the message!:slight_smile:

So are you saying try to get into a IB earlier then close it 15 min before the news to have the money to pay for the strangle? So if the strangle plays out i profit if not i break even basically? This could work and it will elimanate the strangle being a bust and then the price sliding out of the IB range later for a total lose, however it does eliminate the opportunity to make the additional $50 on the IB.

I will demo trade this to see, thanks for the your idea and message.

Best, -Rich

#13

for the most part yes. when doin a BF into the news, I want as wide as I can get plus time and excess volatility. I’m selling excess IV and time is another bonus. I’ve noticed that, at times, when I have a Condor or BF on into news, Excess IV starts getting pulled out and I’ve already collect most all of the time value. So, let’s say I collected $50 on the BF an hour or so out, and while looking for a mis-priced strangle before the news, I can get out and keep $35 of the $50. Then capital is freed up and risk off the table. then I see a strangle that is mispriced I may spend $25 of the $35 on it. So still positive and a free trade for an unexpected move, but has to be mispriced for me to put the strangle on. Not gonna spend the $ if not.

However, if things are so mispriced your strangle (which I try to keep total cost to $30 or so) is inside the BF then that’s really cool! Just let me know, i want it too lol.

I have published some articles on Hedging. So guess my original thought when reading your post was what risk are ya trying to minimize and is it worth the cost? By definition, a hedge is transferring risk in which you have an economic benefit or loss. That transfer of risk costs $ that will always reduce the economic benefit of the hedged instrument. So, if using a BF to hedge a Strangle or vice versa is, in theory, a break even trade unless you are doin it as a Risk Arb trade. Then instead of a hedge you are smartly taking advantage of the options being mispriced. Easier to find mispricings on Nadex binaries and Spreads than other, more efficient, options markets.

Sorry for babbling, but hedging risk away, always has an economic cost. However, Risk Arb, when it can be found, pays off nicely

#14

Ok, so I guess my next question would be how soon before the news are getting into the IB?

To answer your questions of what risk I was trying to minimize - I really set this trade up to try and benefit from a big mover if it happened, after losing so many strangles to news that did nothing and not being able to find IC’s I also wanted a way to benefit from that too that’s why I put the IB in too, however I like your idea of getting the risk out of the way with an earlier struck IB this makes sense, just want know how long before to strike it and am I looking for and exp near the release?

As for trades that are not news realated what would you suggest:

ATM binaries - this is ok if you have a good sense of the direction it will go and you can recover a loss with just one win but its a directional trade Longer term IB- I like this idea because the market really does not have to do anything, just requires more capital to have tied up Longer term OTM Binaries with take profit orders - This option have been thinking about because if you can get them cheap you set take profit orders and only have $10 or $20 price change in the option and you are making 100% on your investment, but of course you need the market to move.

Would love to hear your thoughts on some strategies for non news trading!:cool:

Thanks for your time!:slight_smile:

-Rich

#15

Can you add in the strikes on the list would make it a bit easier to follow along for newbies.

This is the strangled butterfly. I have some old webinars on it somewhere. Maybe i should add that back to a future webinar to make a more current one.

lets try to let the post run together in 1 long post so the ideas flow together versus separating in different post - love the post keep it up.

#16

Hey Guys,

Here is another news trade I did yesterday on the AUDUSD:

The setup on this trades was superb, however the news did not cause a big reaction in the market so the strangle did not play out but the Iron BF worked out so still a small profit. I have attached a pic so you can see the setup, I will explain why this setup was so nice below:

#1 - I was able to get the strangle inside the Iron BF #2 - Because I was able to use 5 tick wide strikes I was able to get very cheap upper and lower strikes for my strangle, in addition and this is the best part, the market only had to move roughly 24 tick in either direction for the strangle to pay off, if you have traded news before you know that a good news spike easily goes way past 24 ticks a lot of times we are talking like 45 to over 50 on a good one so having the strangle just 24 ticks away is fantastic!!:cool: #3 - Although I had to go out kind of far on the Iron BF for expiry to get my pricing I found a 60 pip wide spread for this Iron BF which is pretty sweet as well!

I set this trade up about 15 min before the news broke and set the strangle to expire 30 min after the news broke, keep in mind when doing these strangles you will need to use the 2 hour expiry binaries, they are the only ones that have the 5 tick wide strikes and there unfortunately not offered on all pairs, the others have 10 tick wide or some don’t even have the 2 hour expiry options at night like AUD/JPY and some others, so be careful of this if at all possible keep with the 5 tick strikes these are great for this!! Just to be clear when I say 2 hour expiry options I mean the new ones they issue every hour.

Also you may want to keep in mind when going out so far with the Iron BF part that there are no other news events in between there before the expiry because that could cause the price to move outside your range, although you may be able to leg into another strangle just before the news, I have not tried that yet and it just came to me, it could work, I will demo it lol.

Should you have any questions or ways to improve this strategy please let me know.

Best, -Rich

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#17

Do you have jing or snagit by techsmith? You can open your original picture up to a large view-able size, capture it, upload it to screencast.com and then post the picture right into the thread using the “insert Image” button.

Like so:

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After you click the “Insert Image” button"

Screencapture%203.png1363x741

Jing is free and super easy to get the hang of.

:cool:

#18

Great job on your trade setup by the way! Looks like it is working well for you!

#19

Excellent got it, thanks Ronin!

#20

Ronin,

I got Jing and captured the pic, uploaded it to screecast, used the URL and it still wont show the pic it only shows a little picture icon, please see my post.

Thx!