Thread by @rohit_katwal

Thread coming on #OptionsTrading
A way to do #IronButterfly on #Nifty #Nifty50

Iron Butterfly is a sideways strategy. It is not to be used in a trending market. It needs some knowledge of Technical Analysis, position sizing and risk management for worst case scenario. 1/n

Trend on #Nifty has to be sideways. I check it via Alligator. Green Circle is the place I went bullish. Blue is my signal for sideways market. It is not easy to follow alligator as whipsaws to opposite side can be intense so one needs to be Iron Hedged. 2/n

When Lips of Alligator are pierced by price on daily charts, it signified that existing trend is exhausting or coming to an end. Underlying like #Nifty does not go V-up or n-down and they follow accumulation distribution phase unless there is a trigger for eg. #Covid19 3/n

Once we have established that trend is sideways, we need to determine strike, expiry, volatility, risk, target and worst-case scenario management.
Strike Selection: Near Wkly/Mnthly Max Pain of Index.
When to execute:Thursday or Friday for coming expiry for max Theta Value. 4/n

If high volatility is expected, then better shift to next expiry but theta decay will be less.
Reward:Risk: I try to keep Reward:Risk of 1:1 approximately. So If I am keeping a target of 50 points, then I won't be risking or holding it for more than 40 - 50 point loss. 5/n

If high volatility is expected, then better shift to next expiry but theta decay will be less.
Reward:Risk: I try to keep Reward:Risk of 1:1 approximately. So If I am keeping a target of 50 points, then I won't be risking or holding it for more than 40 - 50 point loss. 5/n

Worst-Case scenario management I will demonstrate through example.

On 3rd Sep I was sideways. Based on Max Pain, I took an #IronButterfly at 11600 with 300 point spread. Risk was 116 points. I was targeting 50 points. Next day, extreme gap down. 6/n

Recovery didn't seem possible. I covered the put side at loss. If I covered the whole spread, it was a loss of 20 points. Covering only the put side could give me minor profit. On 9th Sep, I covered the call side at max profit. Spread gave me a 10 point profit in worst-case. 7/n

I was expecting increased volatility. When market settled at 11400, I again checked Max Pain of monthly and created a monthly Iron Fly with 500 point spread. Max Reward of 304 but safety was more. This spread in 5 days ended with safe 20 point profit. Decay was less. 8/n

Max Pain shifted and I shifted this Iron Fly to 11500 and again took 30 point benefit from the sideways movement. 9/n

Points to remember:
1. Alligator was sideways on Daily Charts, so I remained sideways. In my experience, pierce of blue lines mean extreme random movement where market goes no where.
2. All I did was Risk-Management and kept a vigilant eye for Theta Decay.