Trade The Journey

Trade The Journey

Last Trade of the Year!

Trading Asset: SPY (S&P 500 ETF)

Strategy: Butterfly (2)

1st Spread:

  • Leg 1: Buy $475 Call
  • Leg 2: Sell (2) $476 Call
  • Leg 3: Buy $477 Call

2nd Spread:

  • Leg 1: Buy $476 Call
  • Leg 2: Sell (2) $477 Call
  • Leg 3: Buy $478 Call

Premium: $1.70/$1.44

Profit/Loss: $0.68/ ($0.37)

Trade Expiration:

  • 1st Trade: Same day
  • 2nd Trade: Three-day Expiration


Given the absence of significant economic reports or market catalysts, I anticipated that the markets would experience sideways trading.

Hypothesis Explained:

The previous week lacked substantial economic data or market-moving events. Coupled with the holiday season transition from one year to the next, I concluded that a Butterfly trade strategy could be the most effective approach. Although the lower trading volume raised concerns about potential market volatility, I was optimistic about maximizing the profit potential inherent in the Butterfly strategy. Predicting the exact price level at expiration is notoriously difficult, a challenge I’ve yet to master successfully.

Trade Management:

The first trade centered around the $476 level with a one-day expiration. The SPY’s closing price hovered near this mark despite significant intraday fluctuations. This position was prematurely closed due to the trading platform’s precaution against potential call options at $476, which, while initially frustrating, turned out to be beneficial as SPY declined post-market close. For the subsequent trade, I decided to extend the expiration to three days, inadvertently increasing the trade’s complexity – a slip in my attention to detail.

On the first day, SPY remained within the $475.35-$476.76 range, below the crucial $477 mark. The butterfly strategy requires time to unfold effectively, and thus, I incurred a loss at this stage. SPY did rise post-close but struggled to sustain above $477.41.

The following day saw SPY oscillating between $476.76 and $477.41, unable to break the upper limit. Despite achieving a profit at one point, I opted to keep the trade open for potential full profit realization. Unfortunately, SPY did not breach the $477.41 level again. On expiration day, the price fluctuated around $476.76 before plummeting to around $473, from which it did not recover significantly.

This trade, again, was closed but at a slight loss. The market’s downturn was attributed to factors like position squaring and rising yields, with the latter likely playing a significant role. The lower volume due to the holiday also contributed to the market’s sharp movements.

Trading Review:

Reflecting on the past week, my trading approach was conceptually sound, but the execution of the second trade required refinement. First, setting a two-day expiration for the butterfly trade would have been more appropriate than a three-day duration. Additionally, implementing a stop-loss once it became evident that SPY was not breaking higher would have been prudent. Trading in a low-volume environment is challenging due to the potential for rapid market shifts and lack of sufficient volume to buffer a declining market.

Conducting post-trade reviews is a nuanced exercise; hindsight often suggests actions that weren’t apparent in the moment. Predicting market behavior is inherently uncertain. Following Linda Raschke’s advice, the focus should be on refining strategies for future scenarios. It’s about enhancing the trading system to better capitalize on market conditions, rather than dwelling on what might have been.

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