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.

Vertical Credit Spreads

Those following the trades in my previous post about Vertical Credit Spreads should see how nice a trade they can be.

The trades went into profit straight away as the market moved in a direction faourable t the spreads, which was the whole idea. However, had I not been nimble enough or been too greedy to take profit, even though the market rallied in subsequent days, there was still profit and time to take them off.

I will be showing more of these very directional trades each week using both vertical credit spreads and broken wing butterflies.

More Specific Trades

I do quite a few trades every day as part of the way I diversify risk. I'm going to put more structure into this blog by posting some more specific directional trades, as well as a monthly income type trade with a directional bias.

Yesterday, my aim was to put these trades on:

They all filled (at mostly different prices) except the KO, which did not fill- but I am still working it. I'm trying to earn about 15% on my margin and stop myself out with a new high unless price is rejected there.

In about a week or so, when I get back to France after being at the Olympics in London, I'll start posting these before the U.S. markets open. Then people can watch the trade unfold as the market makers try and get orders filled at their price while I try and get a mid price fill with the time constraint of the market moving.

Out of SPX

I took my profit on the SPX. See the pic. I'd been in the trade long enough and I took a 6% profit and re-invested my margin in another trade. By the close the trade would have been down. My profit taking was more good luck than good management,  or maybe I saw something that I didn't know I was seeing. Anyway, if a trade is making a reasonable profit and looks like stalling then it's better to grab the profit than give it back.

Updates AAPL and SPX

I scratched my AAPL trade (broke even except for commish). My idea of a better reception for the quarterly news was wrong. What was good that even when I wasn't right, I didn't lose on the trade. Options are a great vehicle.


The SPX trade is still open. As you can see from the risk graph below, I'm almost at my 10% profit, but not quite. I've been in the trade since July 17 and would like to get out now, so I might accept 8% rather than 10%. I'll see how the day progresses.

I'm planning on putting on a major RUT butterfly today or tomorrow. Major due to its size and type. I'm going to scale into the position if the market co-operates. More details when the first leg is on.


Meanwhile, I'm heading to the beach this morning as it's going to be a scorcher here in France. More vistors arriving here tomorrow. I'm only day trading when I have time and letting Flo, my algo, do the daytrading most of the summer and these option trades only need looking at once a day. Freedom!

AAPL Losing Trade, So Far, SPX In Profit

So far, the AAPL trade from yesterday looks like a losing trade. The numbers last night caused a late sell off in AAPL. I'll manage the trade and try to get out at break even or a loss if the market doesn't allow that.

My SPX trade has almost hit a 10% profit and I will be looking to take it off at 10%.

I'll post the results.

Apple Earnings Spec Trade

I bought a Broken Butterfly on July AAPL. I BOT +590 PUT, --585PUT, +575PUT. I'm banking on either a good reaction to the earnings report tonight or one that doesn't take out my short 585 PUTs. I've traded July as they expire on Friday.


This is a pure speculative trade and I'm risking a maximum of just a bit under $10,000 and I can make 28% on the trade. The maths of this trade only work with the high win rate I have with them.