Hello again everyone! I hope today, this week, and even this year is going well for you. At church the past few weeks the message received has been pretty simple, go and make disciples. Simple, sure, easy, I’m not so sure. I think any person of faith would agree it isn’t easy to convince someone that their own way is wrong. Unfortunately, many times life has to kick us down before we realize a change is needed. I know that was the case for me and I know people tried with me along the way. Still, if you’re reading this today, we must continue to share the good news of Jesus and trust He will take it from there.
With that, I’ve been on an options strategy kick these past few weeks and for anyone hoping that was over, I’m sorry to disappoint you. Over the past year I’ve shared my favorite strategies, some that I’ve considered, and many that I’ve traded. In the end, some worked but some didn’t, which we should all by now have come to expect. Still, I’m always on the look for opportunities to improve and in today’s post I’ll be attempting as much.
Now, I’m not going to be bold enough to say this is “The” strategy. But, if you’ll stay with me as we go through, you may just like what you find. I know I sure did.
The strategy, or combination of strategies, is a broken wing butterfly, a debit put spread, and a calendar call spread. Crazy, I know, but what they create together is more than interesting. Let’s get into it.
Post Agenda
- Exotic Options Strategy Overview
- Complete Exotic Options Strategy Construction
- Butterfly Foundation
- Debit Put Spread Considerations
- Calendar Spread Thoughts
- Putting it All Together
Exotic Options Strategy Overview
To begin, I included an image above so you could understand what I’ve put together here. No, it isn’t an electrocardiogram, which is exactly what I thought of looking at this chart. Instead, it’s a collection of 3 different strategies all put together. Three strategies you’re all probably familiar with but, maybe like me, haven’t considered combining them together.
They are, in order of how I enter them; a broken wing butterfly spread, a bearish put debit spread, and a call calendar spread. I’ve included links to respectable websites if you want to learn about each from someone other than myself. In any case, each trade is put on for a debit and the risk is technically defined as you can see from the images above or below. As such, there is an upfront cost but also some buying power requirements to be aware of.
For this trade, you can see I would have to use $496 dollars to enter the position and then another $500 worth of buying power. A total of $1,000 dollars to enter the position. However, I’ve tested this strategy from 2021-2025 and have yet to have a loser. Now, that’s impressive but I did have some management rules and at no point did I attempt to reach anywhere near the max profit potential for those peaks. Which is, in this instance, over $1,300 at the peak of the butterfly.
In all, I’m just impressed by this exotic options strategy or this collection of options strategies. I’ve traded each of them separately, and even adjusted positions into something similar. Still, it never occurred to me to just enter the adjustments at the outset which is exactly how I arrived at this trade.
Complete Exotic Options Strategy Construction
Let’s first break down this trade to see each respective component. Here are the P/L graphs for each strategy.
Starting with the broken wing butterfly, you’ll know it’s one of my favorite strategies. I like the slower nature of that trade with the ability for profit to “drip” into the position. I felt that made sense as the foundation for this exotic options strategy.
That said, I never liked the thought of a steep market decline leading to such a large loss. Large by comparison to my profit goal for these trades. Usually, I target around 10 – 20% of the total loss as a profit target. So comparatively, a near $700 dollar loss does kind of fit the statement, “picking up pennies in front of a freight train”. So, after testing a few different bearish positions I ultimately landed on the put debit spread. When you add in that spread, not only is the downside protected, it can even be profitable. Which can be seen from the image below.
I thought this looked good initially but the greeks were a little out of whack. I had increased my upside risk, was now short delta, and short vega. For trades like this, I really prefer neutral delta and positive vega.
That’s when it occurred to me I could just start by including what I normally use as an adjustment. By adding the call calendar spread, I effectively neutralize delta and dramatically increase vega. Such a dramatic vega increase isn’t my preference, per say, but it’s better here than short vega, in my opinion. Below, is the very first image of this post again of the entire exotic options strategy for comparison.
So, to sum up how I’ve constructed this trade;
- Broken Wing Butterfly at around 100 DTE
- Long put at or in the money about 50 delta
- 2 short puts 20 – 30 points lower around 30 delta
- Long put 25 -35 points lower around 20 delta
- Put debit spread
- 10 point wide put debit spread
- Long put at around 15 delta
- Call Calendar spread
- Short call on front month around 15 delta
Butterfly Foundation
I’ll be brief in these next few sections but I think they’re important to provide some context. First, if you’ve visited this site before you’ll know how much I like these BWB trades. Generally speaking, they’re slow moving trades. Meaning, you won’t wake up to any surprising amount of profits or losses. Of course, an outlier type of move would change that statement.
Typically, the broken wing butterfly offers an attractive profit and loss zone for a delta neutral style trade. In this instance, the butterfly is about 40 points wide. So, any neutral trading within the profit tent would see profit build into the position.
Admittedly, I’ve never liked the negative vega effect of these trades at the outset. Though, it wasn’t a deal breaker previously for two reasons. One, because volatility has been and usually stays quite low. And two, when I enter the calendar adjustment which is almost always necessary, the vega profile flips to positive. I prefer the positive vega because it isn’t often, while volatility is low, we get a dramatic fall in volatility. Usually, it’s a dramatic spike in volatility. Thus my preference for positive vega.
Still, in this exotic options strategy I’ve built, vega is dramatically positive and that does cut both ways. Even a slight fall in volatility has a negative P/L impact. To combat that problem, it would be important to only enter when the VIX is at a low or has been low for some time.
Debit Put Spread Considerations
Once the broken wing butterfly is in place I can then turn attention to protecting the downside. In this exotic options strategy, I’ve decided on the debit put spread for a few reasons.
First, a long put is just way to costly that far out from expiration. To enter a long put at the 545 strike would cost almost $500 dollars. Sure, an argument could be made that I won’t lose the entire debit but theta would just be eating away each day. Currently, that long put has a theta of -6.48 or over $6 per day. Not something I want from an overall trade designed to keep theta positive.
Second, I don’t need unlimited downside protection. I run long puts in another arm of my portfolio so doubling down on a decline is just wasted money, in my opinion. Since, I’ve already accounted for that it wouldn’t make much sense and would be particularly painful if the market were continue rising. I just needed downside protection for this position and put debit spreads more than cover the maximum loss that far away from the money.
The third reason has to do with a combination of previous reasons. The put debit spread is comparatively cheap. So, it doesn’t impact my positive theta preference for the trade. Similarly, the spread is so far away from the money, it doesn’t impact my delta dramatically. Allowing me to keep delta as close to neutral as possible.
Calendar Spread Thoughts
I typically trade the calendar spread these days as an adjustment to my broken wing butterflies. Prior to dreaming up this exotic options strategy it had never occurred to me to use an adjustment trade as part of the initial trade. That said, in this strategy, the greeks just line up to create a great setup.
The calendar spread has a dramatically positive vega profile which offsets the typically short vega from the broken wing butterfly. Theta isn’t wildly negative, at least not compared to a long put or an ATM debit spread. In either of those two examples, the daily decay really defeats the purpose of the entire position.
Finally, the calendar gives me upside profitability which is the reason I use it as an adjustment to the butterfly. When price rises in that trade I need the upside help. The only difference here is I start with it instead of entering into it. Still, I suppose there is an argument in favor of keeping the calendar as an adjustment trade within the exotic options strategy trade here.
Exotic Options Strategy – Putting it All Together
Seeing as how there are so many parts to just one trade. I thought it made sense to kind of sum up all my thoughts here. The position is more or less an elaborate broken wing butterfly trying to neutralize any wild greek figures. In doing so, It creates a broken wing butterfly with a much wider profit zone. In this instance the butterfly has a profit zone of about 40 points. Adding in the other options trades makes that zone about 100 points wide.
Moreover, since I’m never planning to hold the position into expiration I don’t have to worry much over that valley between the broken wing butterfly and the calendar. From testing and the Thinkorswim analyze tab it seems like that area doesn’t become problematic until the last 10 – 15 days until expiration.
The exotic options strategy trade I’ve described here is, as simple as I can describe it, an adjusted butterfly spread with downside protection. By setting it up in this “all in one” format I effectively create a wider broken wing butterfly without the pronounced negative vega. I keep the positive and growing theta, although less so than just the butterfly itself and I keep delta neutral.
Trade Management Thoughts
My initial thoughts, from back testing, are to hold the trade for about 40 – 50 days to give enough time for profit to enter the position. Over this time I would need price to move slightly higher or lower, or I would need volatility to rise. All of which are likely to happen, in my opinion. In this instance, I have a maximum possible loss of $995 so my profit target will initially be set around $100 or 10% of that loss.
That said, I will never see that amount lost. Even at 60 days into the trade the most I could be down would be on the upside at about a $300 dollar loss. Although, to reach that loss price would have to go through my calendar spread profit tent. So long as price doesn’t shoot higher immediately, I think the trade could still be profitable.
Finally, I’m not planning on adjusting the overall trade. In reality, the trade is an adjustment in and of itself. If price rises past my calendar spread prior to profit being built in, I would just accept the loss. If price fell dramatically, I would just sit patiently waiting for the put debit spread to near max profit or for price to reverse back into one of the profit tents. In either scenario, I could be profitable and potentially wildly so.
Until the next post.
God bless,
Jeff
