Using “Iron Butterflies” To Trade In A Sideways, Choppy Market

Using “Iron Butterflies” To Trade In A Sideways, Choppy Market
Using “Iron Butterflies” To Trade In A Sideways, Choppy Market
Using “Iron Butterflies” To Trade In A Sideways, Choppy Market Getty Images

When you trade binary options, the trend can be your friend. But what if the market isn’t trending? Sometimes markets will just chop sideways, showing almost no direction. If you’re a trend trader, and you don’t have a strategy for sideways markets, it’s pretty easy to get chopped-up.

Tuesday, March 15 was just that kind of day for the E-mini S&P 500 Futures market. The overall trend direction for most of the day was barely bullish with large, choppy action. From the Opening Bell throughout the entire morning session, the E-Mini S&P 500 Futures were range-bound between 1995 – 2001.  With no clear direction on which direction the market was heading, the decision was made to take a look at trading an “Iron Butterfly” going into the lunchtime hours, when the volume of trading tends to fall off. Christopher Wall, an active trader, does a great job of explaining how Iron Butterflies work in this short video.

Let’s take a look at a 5-minute chart of the Nadex US 500 Index, which is based on the CBOE E-Mini S&P 500 Futures Index.

Using “Iron Butterflies” To Trade In A Sideways, Choppy Market

As you can see. the US 500 Index had been very choppy before the Opening Bell. At 10:00, the Index started to make a move to the upside, but gave back most of its gains by 11:00. Since choppiness appeared to be ruling the day, the decision was made to pull up the 11am-1pm Nadex charts and look for an opportunity to trade an Iron Butterfly.

An Iron Butterfly is as simple strategy for sideways-moving markets. You SELL from a comfortable strike ABOVE the current price of the market, and you BUY from a comfortable strike price BELOW the market. In this case, “Comfort” was determined by price points where the market hadn’t traveled during the day. The SELL Strike was never touched, and the BUY strike had been briefly touched before the 10am uptrend. Since the market had been ranging between 1995 and 2001, it was time to wait until the market traveled to the middle point of this range, around 1998. Both contracts were available for $80 risk, per contract for a $20 reward on each side.

The SELL leg filled at 11:49 and the BUY leg filled at 11:57. With an hour left in the trade, it was time to manage the trade. If either leg was threatened by a breakout, it would be time to exit the trade for a small loss. But that never happened on March 15. The market continued to drift sideways, expiring at 1999.00 almost exactly the mid-point between the two strikes. The maximum reward of $40 per contract was realized on this lunchtime trade (exchange fees not included).

This was a textbook example of an Iron Butterfly, and this strategy can work quite well if you are trading a sideways-moving market. Iron Butterflies can be an effective trading strategy if you know a market is likely to move sideways. This often occurs in the hours before a major economic news release.

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