I am going to show you several risk graphs - the numbers may fluctuate a bit as I have copied them during a half hour of trading.
First my current position (reduced to public size).
The then 2nd butterfly
The original butterfly:
The first butterfly with a full (directional adjustment)
It is the last graph I want to spend some time on.
As you can see if I would make a full size adjustment (which i don't) I would make $3100, if the market doesn't move back to the 450 level. Since the original trade was approx a $4500 investment - $3100 return would be greedy. We are looking to make 20% on $4500 - I can still take another $2200 loss on the losing side of this butterfly - before a full directional adjustment would not give me the desired 20%. If I only try to get out break even - I can even wait another $3100.
This knowledge gives me time; time to let the market tell me what we are going to do - plus time to let March expiry to come closer. Par example if end next week we pass 390 in the rut the chance in the remain time that we whipsaw back to the 450 becomes smaller and smaller. So my directional risk for the full adjustment has become smaller by letting time pass.
We are not going to do the adjustment in one big all or nothing step. I will do in 5 small steps. If I do the first step $10 before we cry uncle - then I can do the last one $10 beyond we cry uncle.
I used an theoretical option price calculator to see were the RUT next week must be for me not to have a potential profit in Butterfly 1 after a full adjustment.
Next week Friday - with a RUT on 390 and a Vix on 55 then the 410-450 spread will be price 9.45. So If I peel of the first spread off at 400, the last one comes off @380. 20 point 3 more spread to do - so approx every 7 point I will need to peel of a credit spread.
The market already came down 55 RUT points in 5 (4) trading days - that is very close to 2SD's for the week. Continuation of this down trend is always possible - but statistically not probable. So back to the graph on the top - my current position - allows me to enjoy the weekend - as I am going to do now.
I will spend sometime on the Moneyshow in NY over the weekend - hope to see some familiar faces.
Enjoy your weekend,
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