With the VIX so low recently, it has become increasingly more difficult to make money from melting time decay. Investors are under-compensated for risk. The market has continued to be volatile while the VIX has spent most of its time hanging out in the high teens to low twenties. This is largely due to the lack of positions in the market. Many institutional traders remain on the sidelines because they don’t want to deal with the turmoil going on in the world. Individual investors are finding the current environment challenging, as they struggle to make money in the markets utilizing conventional trading approaches.
Though current conditions are less-than-ideal for generating income in the markets, I continue to find great success with well-timed long butterfly positions. I have had an average weekly return in excess of 20 percent trading the long butterfly over the past seven weeks.
The typical scenario for trading a long butterfly is to put it on near expiration and then hope that the stock doesn’t make a move before it expires. I don’t like to use a long butterfly during that time frame, preferring instead the possibility of a short butterfly. My usual long butterfly entry is on Friday, using the options that expire the following week (seven days out).
Oftentimes I’ll hold the position over the weekend and then take it off the table on Monday. If the stock is relatively calm I’ll consider holding the position into Tuesday to melt away more time decay. If the stock continues to stay calm I’ll take off half the position and hold the remaining half into Wednesday. It’s rare that I will hold a position beyond Wednesday, given that’s when the butterfly is most sensitive to a move in the stock.
One of my favorite stocks to run this strategy on is CAT, with $5 spacing between the legs. It has yielded nice returns nearly every week.
In conclusion we can still generate income from time decay; we just need to be smart about it!
Karson Keith’s interest in trading started at a very young age. By age 13, he began trading and managing his father’s money. Today, his passion for trading has attracted a following of like-minded income traders seeking his help in taking their trading to the next level. Karson specializes in cutting-edge options strategies, volatile markets and small trading accounts. He not only has single-handedly grown several small accounts into large portfolio margin accounts within just a few months, but he has also helped countless people achieve the same results.