Weekly Iron Butterfly Backtest (Part 1)

With this post, I’m going to start backtesting a weekly iron butterfly trade.  I have been hearing from a number of traders that when traded every week, this can generate an average profit of 3-5%.  My skepticism reigns supreme.

My trading plan will be as follows:

–Enter trade at the money on Thursday before expiration week.
–Target 10% profit on initial capital and keep max loss at 20%.
–If market rallies 10 points from initial price then roll out distressed short option by 10 points.
–If market moves another 10 points in the same direction then repeat adjustment or roll entire spread.
–Also at second adjustment, roll profitable vertical closer to the money to manage margin requirement.
–Do not adjust if P/L is positive.
–Assess transaction costs of $6/contract.

Hopefully I will be out of most trades by Monday or Tuesday of expiration week.

I have backtested this before using $16/contract transaction fees and gotten terrible results.  I realize $16/contract is harsh.  When it comes to transaction costs in backtesting though, I usually spare no potential expense because this is a great way to make a trade seem more profitable than it really can be.

As I said, I’ve heard a number of other traders say this works.

Traders lie.

Could I be missing out on a good thing by being too skeptical?

Here’s to second chances!