RUT Butterfly vs. SPX Butterfly by Josip Causic

“Everything is relative to something else” is what Albert Einstein once said. This statement could be applied to options. Specifically, we would not know how good or bad a call Broken Wing Butterfly (c BWB) is unless we have at least two examples of it. Hence, this article shall look at the c BWB on the RUT (Russell 2000 Index) and the c BWB on the SPX (Standard & Poor 500 Index).

PART I: THE RUT

On 3/16/2022 the call Broken Wing Butterfly (c BWB) was placed with the intention of holding it until the end, knowing that it might get pierced multiple times due to the volatility caused by the Fed announcement. Unlike the Tesla trade (click her on the hyperlink https://www.tradewithufos.com/managing-a-tsla-options-butterfly-paid-by-a-credit-structure/) which was also the call Broken Wing Butterfly that was managed in segments, this RUT trade was treated as a single structure from its inception until its end. It was placed for 0.85 credit, risking 4.15 with the possibility of earning 5.85 The Figure 1 shows the entry ticket of this call Broken Wing Butterfly with all the relevant details.

Figure 1 (Source: ThinkOrSwim)

However, the chart 1 shows the RUT closing price of 3/16 Fed Day, which was also the settlement price 2030.72 the debit of 1.95 was created and charged by the broker for that particular structure.

Chart 1 (Screenshot created using TOP)

The bottom line was that at the expiry, the RUT c BWB did not achieve its maximum profit of 585. Instead, the RUT earned 157. The long 2030 call at the expiry was at-the-money (ATM) having the $72 of value because the settlement was 2030.72 and when the credit of $85 taken in at the entry and $72 are added the profit of 157 was achieved.  Figure 2 displays how the long 2030 call gets exercised by the Broker at the value of the strike price which gets multiplied by a hundred (203,000) and then it gets sold at the settlement price (203,072) earning the difference.

Figure 2 (Source: ThinkOrSwim)

Nevertheless, the similar call Broken Wing Butterfly on the SPX was even more profitable, for it settled closer to its gut (its middle strike price).

PART 2: THE SPX

The SPX c BWB, placed on Monday March 4th, was entered with the same intention of holding it until the expiry, which could be considered as a day trade. The expiry was March 4th. Personally, I view c BWB as a Bear Call with the built-in protection. Due to the fact that the Bear Call’s width was wider by five points than the width of Bull Call, the credit of 0.40 was received, shown in Figure 3 below. Had the SPX closed below 4325 the lowest strike price then the only profit would be only $40. While $460 was the maximum risk, max profit could have been $540.

Figure 3 (Source: ThinkOrSwim)

However, the SPX has closed at 4328.87 or near the gut of c BWB. Namely the gut was the 4330 sold strike. By owning the long SPX 4325 call, its intrinsic value was 3.87 (Shown with the green rectangle on Figure 4). Whereas the higher units; the long 4340 call and two short 4330 calls were out-of-the-money and have expired worthless. Overall, at the entry the SPX has earned $40 after  the settlement $387 equaling $427.

Figure 4 (Source: ThinkOrSwim)

In conclusion, the main similarity between these two trades is that they were both cash settled. By frequently trading the same products (such as the RUT & SPX), the intimacy is developed. An options trader has at his/her disposal the wide range of strategies that could be utilized on those same tickers day-in and day-out; hence, a search for the trading candidates is eliminated. The c BWB is one of those tactics that could be traded knowing with certainty that the Broker will NOT exit them on our behalf in the last few minutes of trading, even if they are ATM as long as those trades were placed on the underlying that are cash settled, such as the major US Indices as RUT or SPX are.



If you have any questions, I would be happy to answer them on the tradewithufos.com website. You can go to www.tradewithufos.com/josip and scroll to the bottom where you will find a Q&A box.

Josip Causic

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