VIX broken wing butterfly

[Guest]

Proposal-- what do you all think of selling a broken wing fly

MAR

SELL -3 16 Calls

BUY +6 18 Calls

SELL -3 22 Calls

Net debit $120

Max profit $480

Max loss $660 (if exactly at 18 at expiration, so loss likely 1/2 or less of this)

You make ~$5 a day on theta, and the risk is centered between 16-20.4, (very small loss below 16). Based on vix and volatility in Jan and Feb seems like a good bet. What do you think?

Edited February 25, 2016 by Davidkot81

[Humble]

Interesting trade. The problem is what happens if the market starts to calm and volatility starts to drift lower? 18-19 is your weak spot, and it's entirely possible that VIX will start drifting there.

[Guest]

With an implied vol about 80% And with an April butterfly, the prob of touching over 20.5 is about 50% while touching below 16 is about 80%.

There is a 21% chance of finishing between 16 and 20. Seems unlikely that it stays in that range the entire time until expiration.

For 1 contract

Loss for below 16 would be -$25 (price paid) max loss between 16-20 -$205, more likely loss about -100 and the max gain (over 22) would be $200 while gain at about 20.5 is $100. Initial investment is about $25.

In highly volatile environments such as now it seems more likely to have a wider range than what is predicted by the std deviation.

Just wondering if it's worth backtesting