🌲SPX 0DTE Iron Butterfly Risk Free Walkthrough

Summary

In this video, Eric walks through a zero DTE (zero days to expiration) options trade, focusing on creating a risk-free position using an overlapping iron butterfly strategy. After selling an in-the-money call credit spread and waiting for a market pullback, he adds a put credit spread to offset risk, turning the trade risk-free with a potential max gain of $550. By the end of the day, the market closes inside the profit zone, and Eric locks in a partial gain of $220–$230. The trade highlights how smart adjustments can turn a risky position into a profitable, risk-free outcome.

Takeaways

• 😀 The trade discussed is a risk-free zero DTE (zero days to expiration) options strategy involving an overlapping iron butterfly.
• 😀 The minimum gain for the trade is $50 minus commissions, with a maximum gain of $550 depending on the S&P's close.
• 😀 The trade was initiated when the S&P was trading at 6050, with the market showing a gap-up and rallying into key levels.
• 😀 A call credit spread was sold with a credit of $810, with a maximum loss of $190 if the trade doesn't move as expected.
• 😀 The goal was for the market to fade a few points, which would make the trade profitable without requiring a significant pullback.
• 😀 After a couple of hours, a put credit spread was sold, creating an overlapping iron butterfly, with a total profit covering potential losses from the first spread.
• 😀 The second spread generated a credit of $240, which, when combined with the $810 from the first spread, resulted in a $50 net profit coverage.
• 😀 By combining the two spreads, the trade became risk-free with potential for a maximum gain of $550 if the market closes within the desired range.
• 😀 The theoretical profit of the trade increased as it approached expiration, allowing the trader to close the position early for a profit.
• 😀 Ultimately, the market closed at 6033, within the profit range, and the trader made a partial gain of approximately $220-$230 after commissions.

Q & A

What is the main strategy Eric is using in this trade?

Eric is using a combination of a call credit spread and a put credit spread to create an iron butterfly. This strategy allows him to lock in profits while managing risk.

How does Eric set up the initial trade?

Eric starts by selling an in-the-money call credit spread with a 6025/6035 strike price, receiving an $810 credit. This trade risks $190 if the market moves against him.

What is the purpose of the second trade (the put credit spread)?

The second trade, a put credit spread, is sold at the 6025/6020 strike price and gives Eric an additional $240 credit. This trade covers the potential losses from the first spread, making the overall position risk-free.

How does the iron butterfly work in this scenario?

The iron butterfly is created by combining the call and put credit spreads. The two spreads overlap, locking in a profit as long as the market closes within the range of the two spreads, with the risk managed by the credits received.

What does Eric mean by a 'risk-free' trade?

A 'risk-free' trade means that after executing both the call and put credit spreads, the potential losses from one side are covered by the credits from the other side, ensuring no net risk in the position.

What was Eric’s maximum gain potential in this trade?

Eric’s maximum gain potential was $550 if the market closed exactly within the profitable range of his strikes, which was between 6025 and 6035.

Why did Eric not get the maximum gain?

Eric did not get the maximum gain because the market closed at 6033, which was inside his profit range, but just short of the ideal point for the maximum profit.

What was the final profit Eric made on this trade?

Eric ended up with a partial profit of around $220–$230, after commissions, instead of the full $550 potential gain.

How much risk did Eric initially take with the first spread?

Eric initially took on a risk of $190 with the first spread, as he needed the market to fade a few points for the trade to become profitable.

What is the significance of the 6050 level mentioned in the script?

The 6050 level is a major option strike level, where Eric expected potential support or resistance. These levels often act as key points for setting up trades, as the market tends to react around them.