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RUT Bearish Butterfly Trade Example

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Today I want to share another trade example with you. This time a Bearish Butterfly from May 2016.

Here is the chart of RUT, showing the entry, adjustment and exit points.

  1. On April 1st, 2016 RUT was trading around 1120 and had experienced a decent run over the preceding one and a half months. The move had seen RUT move from below 950 to 1120 or around +20%. The index had been somewhat overbought for about a month and the 200 day moving average was just ahead.

This was a perfect set up for a Bearish Butterfly. Momentum looked like it would carry the index a little higher before experiencing a pullback.

With RUT trading at 1120, we centered the initial bearish butterfly at 1100.

RUT Bearish Butterfly

2. By mid-April, RUT reached 1140, which was the first add point. Here we added the second butterfly centered at 1120.

3. On May 3rd, RUT dropped back down towards the center of our structure. We had butterflies centered at 1100 and 1120, so when RUT hit 1116 early that day, I was happy to take profits. With expiration only 13 days away, the value of the bearish butterfly would start to swing pretty wildly with any further move in RUT. Total profit on the trade was $1,740 on total capital at risk of $5,280 for a return of +32.95% in just over a month.

If I held the trade for another 2-3 days profits would have been a bit higher as RUT moved further down into my profit zone and time decay started to ramp up, but I’m always happy to close these trades when +30% is reached.

RUT bearish butterfly trades

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

1 Comment
  1. Kris says:

    Hello Gavin,

    Thanks as always. best wishes

    Kris,

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Options Trading 101 - The Ultimate Beginners Guide To Options

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