Today I launched a new trade that I will track for the September expiration. I haven't featured a butterfly, yet I carry some nearly every month. Specifically, this one is on MNX, the mini-NASDAQ-100. It operates at one-tenth the value of the NDX.
To start things off we have two graphs. The first shows a basic Butterfly with strikes at 147.5/160/172.5. The one thing I want to point out here, which is a standard characteristic of Butterflys, is the negative Deltas (-48). You can see this expressed in the graph by looking at the steep slope of the white line on the right hand side (under the arrow). It's very clear that if the price moves up our trade will lose value quickly.
To counter this characteristic I have added an extra call at the 172.5 strike for each fly-spread. This drops our Deltas to -17, flattening the equity curve substantally. You can see the line under the arrow is now much flatter.
My risk management for this trade is extremely simple. I will either take it off for a 15% profit, OR a 10% loss. In the past I have used many different types of management including adding more butterflys, adjusting by adding or removing spreads, moving the butterfly, etc. But this simple management approach tends to be easy and fairly effective.
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