These strategies are used in neutral to bullish markets. In these trades, Theta is your friend and angry bears are your enemy. These strategies are for advanced traders. Be aware that with an SPX Short Credit put spread the angry bears can rip your face off, throw it on the ground, chew it up, and swallow it before you even know what happened.

Why SPX? Because of Liquidity and cash settle.

The Strategies

Credit Put Spread

  1. Enter the trade at approximately 3:30 pm the day before expiration
  2. Sell 1 out of the money put at 5 delta
  3. Buy 1 out of the money put 10 points further out.
  4. Set stop losses at 2.75 times premium
  5. Set the closing limit for a .10 cent debit.

Broken Wing Butterfly

  1. Enter the trade at approximately 3:30 pm the day before expiration
  2. Sell 2 puts out of the money near 20 delta (B in the Example). Some folks like to use the expected move price for the short leg. I find it easier just to use 20% ITM% or 20 delta.
  3. Buy 1 Put 1 point above short leg (C in the example)
  4. Buy 1 Put 2 points below short leg (A in the example)
  5. Set limit for .60 cent credit. If it does not fill then no trade for that day. It sometimes fills for better credit.
  6. At the open of expiration day, if the profit is 50% or greater at the market open.

The Data

January 2021 5 Delta Credit Put Spread Stats

The underlying risk/buying power on each of these Vertical Put Spread trades was approximately $24,700

Notes:

Trade # 6 – automatically stopped out. Trade #10 – the opening price opened below the breakeven. I had to manually close because the back-testing software I was using did not trigger the stop. The market tanked that day and if I would have let it go to expiration I would have lost around $20,000 that day. Trade #11 – automatically stopped out.

Note: I stopped back-testing the Credit Put Spreads because at this time during this market the BWB trades seem to be working.

January 2021 Broken Wing Butterfly Stats

The underlying risk/buying power on each of these BWB trades is approximately $2,200

Notes:

The negative numbers you see in the price column actually closed for a credit. These are days that the underlying price of the stock was hitting the sweet spot. I manually closed all these trades. I am not sure at this time how I want to tackle setting stops on this trade yet. I may do another study at a later date which opens the trade at 3:30 pm the day prior to expiration and then close the trade immediately at the open.

Trade #10 breached the breakeven at the open and was immediately closed. Trade #11 breached the breakeven and was closed.

February 2021 Broken Wing Butterfly Stats

Beginning with this month, I closed the trade at the open if the profit was greater than 50%. Many times these trades would close over 100%. It appears that these are getting volatility contraction at the open even though the underlying is not hitting the sweet spot. Some trades were gaining greater than 100% profit. I would adjust the closing price a few times on some trades to get out of them early. For most of the trades, I was out within a few minutes after the open. We will see how this does trading live and I will post the stats here.

Notes: Trade #8 and #11 briefly opened in the money and opened at a small loss. These trades are pretty resilient. In a few minutes prices began to equalize and ended up closing for a profit. I had to wait a bit and watched the chart to make sure that the underlying was not going to be in the money on all three legs.

March 2021 Broken Wing Butterfly Stats

December 2018 Broken Wing Butterfly Stats

I wanted to look at December 2018 that was supposed to be one of the worst months in history for trading. Some of the data were incomplete in ThinkorSwim so this was all I could extrapolate. For the data I had, it looks like the BWB did remarkably well.

Conclusion

As time permits, I will back-test more months to get a fuller picture of these strategies.

I think the numbers show that The Broken Wing Butterfly is the clear winner in this current market. I like this trade because you are using less buying power and there is a better reward for the risk.

1DTE SPX Put Spread

As you can see the 1DTE Delta 5 SPX trades ended up in the red and was a -6.34% loss in terms of capital risked for the month of January. Closures were automatic except for Trade # 10 due to buggy software.

Pros:

With this trade you can set it and forget it.

This is a cash settled trade, no risk of assignment.

Cons:

You are risking a lot of capital for little return.

One bad trade can wipe out a whole month or more of trading.

Because you are risking so much capital and this is more a synthetic put trade, this trade can go negative extremely fast. You must set stops or risk your face being ripped off. My face has been ripped off a few times before I learned that the market is always right.

1DTE SPX Broken Wing Butterfly

The 1DTE Broken Wing Butterfly was a 111% gain in terms of capital risked for the month of January. I manually closed these trades.

Pros:

There are four ways to win this trade, it goes up a little, goes down a little, goes up a lot, or does not go at all. The only way to lose if if the trade expires in the money past the breakeven.

You are risking less Capital risked than the 5 delta Put Spread trade for potentially the same return. The risk to reward seems to be better at this point, but that may prove different with further back-testing.

There is a built in lottery ticket / sweet spot that gives you over 100% gains.

I found that there appears to be serious volatility contraction at the open. It is sometimes a little hard to close the trade because of this, but when you catch it you sometimes get out of the trade at 100% or better profit.

This is a cash settled trade, no risk of assignment.

Con’s:

The sweet spot is not an easy target to hit.

You have to have patience for these trades to fill and close. Since I will only open for 60 cent limit, it may take a while to fill. Typically up to 10 minutes. I will not adjust lower, if it does not fill, I must do not do this trade that day.