Welcome everyone, I know God is at work today in this lost and dying world. For encouragement, continue ignoring that all to human voice pushing you the wrong way. Jesus gives us all a choice, do your best to follow His word and if you mess up don’t beat yourself up. We are already forgiven!

With that I want to discuss an options strategy that I’ve covered here before. The broken wing butterfly, or as I’m increasingly finding it, the rhino options strategy. In today’s post I’m going to dial the original rhino options strategy down to something a little more palatable, appropriately named, the baby rhino options strategy.

Let’s get into it…

Post Agenda

• What is the Rhino Options Strategy?
• What is the Baby Rhino Options Strategy?
• Which one is better?
• Entry, Exit, & Management of the Baby Rhino Options Strategy
• Baby Rhino Trade Example

What is the Rhino Options Strategy?

They say a picture is worth a thousand words so I won’t be long winded and instead trust you can identify its name from the image that follows. However, to state it briefly, the rhino options strategy has a p/l graph that favors a rhino’s head. The basic premise of the strategy is to capitalize on theta decay while keeping delta neutral. That said, the rhino doesn’t present itself until later when an adjustment becomes required. In any case, here is an image of the rhino trade once the aforementioned adjustment has been initiated.

I Included the image of a rhino for comparison sake so those unfamiliar could see how the name was derived. Kind of silly really but I guess whoever came up with it decided it was better than calling it an adjusted broken wing butterfly.

The strategy is comprised primarily of a medium duration broken wing butterfly to capture theta decay from the two short contracts at the peak of the largest “tee-pee”. As time passes, those short contracts decrease in value and bring profit into the trade.

The most common adjustment to create the rhino image is a call calendar spread. However, any trade that would offset the negative deltas on an up move would technically work. Personally, I prefer the calendar as well since it doesn’t alter the T+0 line very much.

For more on the original rhino options strategy, have a look at this post from Options Trading IQ, “Trading the Rhino Options Strategy”.

What is the Baby Rhino Options Strategy?

I’m sure there is another name for it but without knowing it myself I’ve just termed it the baby rhino options strategy. Admittedly, this strategies p/l graph doesn’t resemble the profile of a rhino quite as closely but the techniques to the trade are 100% the same. The only difference being the asset traded.

In the original rhino strategy, SPX or RUT are generally preferred due to their size. However, with that size also comes larger potential losses and the need for a larger account. Therefore, with the baby rhino, I’ve altered it slightly to trade SPY, QQQ, TLT, etc. In reality, the strategy could be performed on any asset but the overall idea remains the same, we want a neutral market. Wild swings or stable trends in either direction knee cap the strategies potential.

Lastly, it’s worth noting that with index options (SPX, RUT, etc.) there wouldn’t be any concern for early assignment. Should the strategy be utilized on SPY or a similar asset early assignment would need to be remembered. However, per the strategy rules we’ll discuss shortly, an adjustment to the trade would be required if the shorts become in the money. Which neutralizes the risk but doesn’t eliminate it so please be aware.

Which Strategy is Better?

Well, that will be largely determined by your account size. If you have 50 – 100K in your options trading account I would think the original strategy is preferrable. If you have 10 – 50K then the baby rhino is likely more appropriate. Additionally, smaller accounts wouldn’t have the necessary buying power to participate in the strategy on larger indexes. Large accounts would of course have the option to do either.

Personally, I don’t trade the rhino per the original rules of the trade. I don’t want so much at risk with just one strategy. In it’s original form the strategy suggests entering half the trade initially then another broken wing butterfly at a later date. Then if needed, add the calendar spread adjustment. I prefer just opening one butterfly and adjusting it occasionally as needed to manage the delta or theta metrics.

Obviously, each of us has our own considerations to make before deciding to play. For those similar to me, the baby rhino offers the ability to play without the enormous price tag.

Trading the Baby Rhino Option Strategy

Now, with the synopsis of the trade over let’s get into the reason you’re likely here. To learn how to trade the baby rhino option strategy. First, we need to identify our market. Generally speaking, the Russell 2000 is a little calmer market than the S&P or the Q’s so for the example’s that follow I’ll trade IWM. Remember though, the strategy can be deployed against any asset a trader feels will remain neutral for a period of time.

Entry Criteria

1. Enter 1 long put option @ 50 delta
2. Enter 2 short put options @ 35 delta
3. Enter 1 long put option @ 20 delta
4. Approximately 75-100 DTE

This isn’t an exact science but more of a guideline to construct the trade initially. Several factors could force an alteration to the trade but the most important aspects at entry are a positive theta number and a delta as close to zero as possible. Additionally, the trade could be made with more or less days to expiration. I prefer around 100 days. To much time and we’re waiting forever for profit to come into the trade. To little time and the structure is increasingly more narrow. Ideally, we want as wide a “tee-pee” as we can get while maintaining positive theta and neutral delta.

Management

Managing the trade is relatively straight forward. Should the underlying decline in price below the short strike without sufficient profit in the trade, the entire broken wing butterfly will be exited for whatever profit/loss exists and a new butterfly will be entered per the entry criteria above, with one exception. When opening the subsequent trade, it would be entered on the same expiration cycle as the original trade. Alternatively, should there be considerable profit already in the trade, a trader may choose to just close that rhino trade and begin again with more days to expiration.

Should the market march higher, the trader will need to keep an eye on delta and theta. Upside losses aren’t as significant so the trader needn’t worry about acting too quickly just be prepared to make an adjustment as needed. Generally using a call calendar spread by selling the call in the same contract month as the original trade and buying the same strike in the following expiration.

If price continues to rally up into the calendar spread “tee-pee”, close the calendar to realize that profit and roll the entire broken wing butterfly up per the entry criteria using the same expiration. However, it’s preferred to avoid this adjustment if the trade has less than 30 days remaining. At that point, the best case is to accept whatever loss may exist and begin again. Though, any losses should be relatively small with the offsetting gain from the calendar spread.

The real crutch to the strategy is a strongly trending market in which a trader isn’t able to keep up the adjustment pace or the market moves outpace theta gain. That said, with careful management, losses can be minimal and profit more than attainable.

Exit Criteria

Exiting the trade is as simple as pre-determining a profit target. Under no circumstances would I attempt to hold the baby rhino option strategy until expiration. I understand the maximum profit is appealing but the gamma risk becomes a very big concern as expiration nears. Any adverse move outside the structure will erase every single cent of profit that existed.

Personally, I like to keep things quick and easy by setting my profit target at 10% of risk. From my very limited experience with the strategy, that profit target can be achieved in about 20 – 50 days given typical market movements. Should the trade require multiple adjustments the profit target will need to be adapted as well. Possibly, moving to a 7% profit target after the first adjustment, then to 5% and so on until time is the enemy and we just accept whatever p/l exists.

Baby Rhino Trade Example

• Starting Date – Jan 3, 2023
• Account Value – $5,000
• Asset traded – IWM

Here is a screen shot of the trade. If you look closely at the middle price slice you’ll notice that theta is positive at 1.47 and delta is nearly perfect at -.01. Exactly what we want at the outset of the baby rhino trade.

After a few weeks in the trade delta and theta have changed to a point it needs to be addressed. To offset the undesired greeks I entered a calendar spread adjustment to create the baby rhino options position. In this instance, I opened 2 calendar spreads to completely return delta to a neutral position. Should I have only opened one, which I prefer, delta would have remained more negative than I wanted at -2.31.

Here is the p/l diagram with the trade closed. Unfortunately with this trade I wasn’t able to realize my approximately $70 dollar profit target with the underlying moving consistently higher. However, with the calendar adjustment I was still able to walk away with a profit of $22 before commissions.

Truthfully, the trade could have been held longer but I had moved under 30 days to expiration and as I mentioned the risk becomes exacerbated that late in the trade. Just for fun I played the trade out until the very last day of expiration and I would have made $165 dollars as the underlying price declined back into the original broken wing butterflies tee-pee. I of course, would never have taken that risk in real trading.

Closing Thoughts

In the end, the strategy is relatively easy and offers conservative investors similar to myself a way to stay engaged without the concern of major drawdown. In the example above the maximum at risk was $598 on the original butterfly by itself. That increased to a maximum loss of $712 once the two calendars were added. Either loss wouldn’t be comfortable, I’ll admit, but it’s hardly the risk paradigm that exists with so many strategies these days.

To close, it’s important to remember a few key components of this strategy. First, keep delta neutral but don’t over adjust the trade. Give it some breathing room to ebb and flow. Once delta is sufficiently out of balance then consider an adjustment or a roll of the entire structure to the current price range. Next, keep a watchful eye on theta. Should theta become negative then the trade isn’t working as intended and an adjustment or a closing order is needed. Finally, don’t get greedy with this strategy. The baby rhino options strategy isn’t going to return any of us epic levels of profit. It isn’t designed to, even if the maximum profit looks so appealing.

Maintain appropriate risk for your account size, a realistic profit target, and manage the trade appropriately. By doing so profit will surely follow. I thank you for taking a few minutes to learn about the baby rhino option strategy, if you have any questions reach me in the comments below.

Until the next post.

God bless and take care,

Jeff