Low Risk SPX Day Trading Strategy + Create a Bot to Automate

Key Concepts

Iron Butterfly: An options strategy involving the sale of an at-the-money call and put, and the purchase of an out-of-the-money call and put, creating a defined-risk position.
SPX: The S&P 500 Index, a cash-settled index used for options trading.
PDT (Pattern Day Trader) Safe: Strategies that do not violate the SEC’s Pattern Day Trader rule, which requires a minimum of $25,000 in an account for frequent day trading.
Slippage: The difference between the expected price of a trade and the price at which the trade is actually executed.
Max Drawdown: The maximum observed loss from a peak to a trough of a portfolio before a new peak is attained.
Profit Factor: A ratio calculated by dividing gross profits by gross losses; a value above 1.0 indicates a profitable strategy.

Strategy Overview: The "Flat Fly"

The "Flat Fly" is an automated intraday options strategy designed for the SPX index. The core methodology involves opening an Iron Butterfly position daily at 10:00 a.m. The center of the butterfly is anchored to the previous day’s closing price of the SPX, with wings set $10 wide. The position is held until the market close.

Backtesting and Performance Analysis

Jack Slocum presented three variations of backtests covering a three-year period:

Test A (Baseline): Only opens positions if the bid-ask spread is $2 or less.
- Results: $17,000 profit, $1,600 max drawdown, 1,000% return.
Test B (Change Filter): Adds a filter to only open the position if the current price is within 0.5% of the previous day’s close.
- Results: Lower drawdown than Test A while maintaining a 1,000% return.
Test C (Pessimistic/Slippage): Applies 10 cents of slippage to every trade in Test A.
- Results: 600% total return, demonstrating the strategy's robustness against poor execution prices.

Statistical Summary:

Win Rate: Approximately 25%.
Loss Rate: Approximately 75% (max loss).
Average Loss: $117 per day.
Average Win: $471 per day.

Scaling and Risk Management

Slocum tested a scaled version of the strategy where the number of contracts is adjusted to maintain a $500 risk per trade.

Performance: $92,000 profit over three years with a $6,000 max drawdown.
Profit Factor: 1.57 (improved from 1.4 in the non-scaled version).
Average Win/Loss: Average loss of $430 vs. average win of nearly $2,000.

Implementation Methodology

To deploy the strategy via the Option Alpha platform, the following steps are taken:

Bot Configuration: Set the bot to scan for entries between 10:00 a.m. and 10:15 a.m. to ensure a higher probability of a fill.
Slippage Allowance: Configure the bot to accept up to 10 cents of slippage from the mid-price.
Capital Allocation: The bot is funded with $5,000 to manage the defined-risk trades.
Automation: Once the bot is created and automations are enabled, it executes the strategy autonomously without manual intervention.

Critical Considerations

Assignment Fees: Because the strategy uses Iron Butterflies on SPX, at least one leg will be in-the-money at expiration. Traders must account for potential assignment fees charged by their specific brokerage, which could significantly impact net profitability.
Risk Philosophy: Slocum emphasizes the psychological benefit of the strategy, noting that because the trade is opened and closed within the same day, it eliminates overnight risk and aligns with the sentiment: "Therefore, do not worry about tomorrow, for tomorrow will worry about itself."

Conclusion

The "Flat Fly" strategy offers a high-win-magnitude approach that accepts a low win rate (25%) in exchange for consistent, defined-risk daily performance. By utilizing automated filters for bid-ask spreads and price proximity, the strategy demonstrates significant resilience against slippage and market volatility, making it a viable candidate for automated trading systems.