Vertical Credit Spread or Broken Wing Butterfly

One of the trades I do is picking tops and bottoms in a swing move. I don't have to be too good at this if I use the right strategy and the math works.

Once I have identified the trade, I need to pick the strategy. This post is looking at a sell of the SPX yesterday. I identified the top and decided that I would use the weekly SPX as the vehicle. My next job was to choose the strategy.

Below as two pics. The first one is the VCS (vertical credit spread) where I sell, in this case, a CALL and buy a call 2 strikes further out. The second pic is the BWB (broken wing butterfly) where I sell 2 CALLS of the same strike as I did in the VCS and bought the CALL the next strike down as well as 2 strikes up.

Let's look at the math.

The VCS has a risk/margin of about $545 with a max possible profit of $453. The BWB has a risk/margin of about $355 and a probable max profit of $141. I say "probable" because there is a small chance that the price will expire at the short strike and provide a windfall of about $550.

Say I have $10,000 to put into the trade.

I can trade 10000/545 of the VCS = 18.35 sets.

I can trade 10000/355 of the BWB = 28.17 sets

The VCS has a max poss profit of 18.35 x 453  = $8312 with a probability of 54.4% of making it.

The BWB has a max prob profit of 28.17 x 141 (ignoring the windfall) = $3972 with a 56.5% probability of making it.

I have another alternative: the 1420/1430 VCS.

This variation has the following stats:

12.38 sets per $10,000, $808 risk/margin and $190 max poss profit with a 77.4% probability of making it. By the close I was 2% into my profit.

The considerations about which to use include:

• Probability of success
• Ease of adjustment
• probability of the windfall (I can maybe widen the price range of the windfall area)
• Ease of getting a fill 

On this occasion, I took this last variation. I wanted that higher probability of profit.  By the close I was about 2% into profit. I do many of these trades as you will see once I start posting these trades before the open - begins Monday.

The weekly options are options on steroids as they are so close to expiry when Gamma is wild. Even when I have an adjustment plan - difficult with weeklies - I assume for risk purposes that I have to exit on the basis of hitting a maximum loss. My math has to be satisfied with a win rate that takes the probable and probability of profit and max loss into account to give me a good return every year.