December 7, 2011 Trade Update - Locke In Your Success

Hi All,

I made an attempt to roll the 660 butterflies to 690 on the January M3 trade today. I say “attempt” because it did not turn out well, so I had to revert to plan B. Luckily, I had a plan B. I think it’s an entertaining series of events, so let me explain.

I’ve been looking for an opportunity to roll the 660 butterflies to 690 for the last couple of days as it was getting to the point where the roll really “should” be done, although it did not “need” to be done. I got it in my head for some reason that I wanted to do the roll this morning so I priced out the put butterflies, the call butterflies and the iron butterflies and that was telling me that I will likely fill at around 7.50, even though the put mid was around 6.80… OK, I don’t “need” to do the roll so I put in an order for 7.20… 0.40 over mid and let it sit for an hour of so…. no fill, which was expected but you never know. Bumped to 7.50 and gave another 1/2 hour… nothing. Now I’m at the price I think is “fair” for the 690 butterflies, $7.50, but I’m also looking at the 660 butterflies and all three butterflies (put, iron and call) are telling me 660’s are going to sell at a really good price and the market is coming down so I’m figuring I can pay up for the 690’s and make up for it on the sale of the 660’s. So I stuck in an order buy the 690’s at $7.90, even though mid shows $7.00. I did this because I know the put butterfly is mispriced and I want it to fill. Now I’m 0.90 over mid and the order still sits there but I decided that $7.90 was as high as I go, so I let it sit for a half hour or so. In the mean time the price completely dropped out of the 660 butterflies so I decide I no longer want the 690’s at $7.90 and decided to cancel the order. Just as I grabbed the mouse, the order fills and up goes the market. I take a look at getting rid of the 660,s and my new analysis tells me that my “expected” fill price has dropped from $6.20 to $5.00. Well that simply was not acceptable, I was not willing to take that kind of loss on a roll, especially when the market has a good chance of coming back into my favor but I did need to protect against a continued up move in the event I was wrong. Luckily, I have a plan for this very situation and knew exactly what I was going to do. I always keep a reasonable reserve in my account just in case this very thing happens. Instead of panicking out of my 660 position and getting completely hosed OR even worse doing nothing and having the market go against me and then panicking and getting REALLY hosed. I simply bought another deep ITM call to hedged off the upside losses until I can trade out of the butterflies in more favorable conditions. In other words, I doubled the trade size temporarily until I can get out of the old butterfly/call position at the price I wanted. I’ve done this in the past and it works very well but ONLY if you have no, or very little, chance of exceeded a max loss number because of doubling size AND you scale back down as soon as your numbers come in !

So my new position is the same as before plus 3 – 640/690/740 put butterflies and 1- 58 IWM call. The position shows that it is down $500 but I’m pretty sure that is not correct because the price on the put butters are over $1.00 from the call and the iron butterflies. If I calculate what I think they are worth, the position is down about $150. The position is shown below: