LVN Strategy Guide

Trading the LVN Strategy with OTM Butterfly

Step 1: Set Up Your Chart

Chart Configuration:

• Use a trading platform with volume profile analysis capabilities (e.g., TradingView, ThinkorSwim)
• Apply the volume profile indicator to your futures chart (e.g., ES futures for the S&P 500).

Choose Time Frames:

• Use higher time frames (15-minute, 60-minute) to identify the overall market trend.
• Use lower time frames (1-minute, 5-minute) for detailed entry points and LVN identification.

Step 2: Identify Market Direction (Pre-Market Analysis)

Analyze the Trend:

• Analyze before the market opens, using the 15-minute and 60-minute charts.
• Identify the overall market trend using moving averages (e.g., 50-period, 200-period).

Confirm Market Sentiment:

• Look for higher highs and higher lows for bullish trends and lower highs and lower lows for bearish trends.
• Use additional indicators (e.g., HullMA, SMA, MA Crossover) for trend confirmation.

Step 3: Identify Low Volume Nodes (LVNs) on the Volume Profile

Analyze the Volume Profile:

• Identify significant price movements within the session volume profile.
• Look for Low Volume Nodes (LVNs) where a noticeable drop in volume indicates a potential price gap.

Validate LVNs:

• Ensure the LVN aligns with key support or resistance levels and significant price action points.
• Confirm the LVN with volume spikes before and after the LVN, indicating a sharp price movement.

Step 4: Plan the OTM Butterfly Trade

Select Strike Prices and Adjust Width Based on Volatility Regime:

• Zombieland (VIX < 17): Narrow width (e.g., 10-20 points wide). Set the middle strike price near the anticipated target level based on the LVN.
• Goldilocks (VIX 17-32): Moderate width (e.g., 20-30 points wide). Set the middle strike price near the anticipated target level based on the LVN.
• Chaos (VIX > 32): Wide width (e.g., 30-50 points wide). Set the middle strike price near the anticipated target level based on the LVN.

Ensure Sufficient Asymmetry (Debit ≤ 10% of Width):

• Calculate the maximum acceptable debit for the butterfly trade, ensuring it is at most 10% of the width. For example, if the width is 20, the maximum acceptable debit is

Step 5: Enter the Trade (Valid Entry Time: 9 a.m. to 10:30 a.m. for Futures, 9:30 a.m. to 10:30 a.m. for Indexes)

Wait for Price Confirmation (Based on Silver Bullet Strategy):

• Monitor the price action as it approaches the identified LVN during the valid entry period.
• Look for a swing high/low violation and subsequent reversal: For bearish trades, wait for the price to move above a recent swing high and then reverse downward. For bullish trades, wait for the price to move below a recent swing low and then reverse upward.

Confirm Reversal:

• Use a 1-minute or 5-minute chart to confirm the price reversal after the swing high/low violation.

Place the OTM Butterfly:

• Execute the OTM Butterfly trade once price action confirms the direction near the LVN.
• Ensure the debit is at most 10% of the width to maintain a favorable risk-to-reward ratio.

Set Stop Loss and Profit Targets:

• Place a stop loss beyond the LVN to protect against adverse moves.
• Set initial profit targets based on the expected move within the LVN range and overall market trend.

Step 6: Dynamic Exit Strategy

Monitor Position Relative to Profit Tent:

• Continuously monitor the price action to see if it moves into the profit tent of the butterfly spread.
• If the price is within the profit tent on a 0DTE day, the positive theta decay will accelerate, increasing profitability.

Inside the Profit Tent:

• If the price is inside the profit tent, hold the position to maximize the benefits from rapid theta decay.
• Monitor the gamma risk as expiration approaches, adjusting the position to lock in profits or reduce risk.

Outside the Profit Tent:

• If the price is just outside the profit tent, use a trailing stop to manage the position.
• If the price moves toward the profit tent, allow the trade to continue, giving it a chance to enter the high-profit zone.
• If the price moves further from the profit tent, tighten the trailing stop to protect against losses.

Gamma Risk Management:

• As expiration approaches, gamma risk increases. Be prepared to adjust or close the position if the price movement becomes erratic.
• Use a trailing stop or manually adjust the butterfly wings to manage gamma risk and protect profits.

Example Scenario

Bullish OTM Butterfly Setup (Valid Entry Time: 9 a.m. to 10:30 a.m.)

Identify Market Direction:

• The market is in an uptrend on the 15-minute chart, confirmed pre-market.

Find LVN:

• On the futures volume profile, identify a Low Volume Node (LVN) at $4050-$4070, indicating a potential price gap.

Confirm with Price Action:

• Price is currently at $4020 and moving upwards.

Plan the OTM Butterfly:

• Volatility Regime: Goldilocks (VIX 17-32), moderate width (20-30 points).
• Middle strike (short strikes) at $4100.
• Buy one $4050 call, sell two $4100 calls, buy one $4120 call.
• Ensure the debit is at most 2 points (10% of 20 points width).

Wait for Price Confirmation:

• Between 9 a.m. and 10:30 a.m., monitor the price as it approaches the LVN at $4050-$4070.
• Look for a swing low violation and subsequent reversal upward.

Confirm Reversal:

• On a 1-minute chart, see the price move below a swing low at $4030, then reverse upward.
• Switch to a 30-second chart and confirm the reversal near $4050- $4070.

Place Trade:

• Enter the OTM Butterfly with the middle strike at $4100.
• Ensure the entry is within the valid time window and the debit is ≤ 2 points.

Set Stop Loss and Initial Profit Targets:

• Stop loss at $4025 (below the LVN).
• Initial profit targets at $4100 (middle strike) and $4120 (upper strike).

Dynamic Exit Strategy

Inside the Profit Tent:

• The price moves into the profit tent and stabilizes around $4100 by mid-afternoon.
• Hold the position to benefit from positive theta decay, monitoring the price closely.
• As expiration approaches, manage gamma risk by adjusting or considering closing the position if the price remains stable within the tent.

Outside the Profit Tent:

• The price is just outside the profit tent at $4080.
• Use a trailing stop to potentially allow the price to move into the profit tent.
• If the price starts moving away from the tent, tighten the trailing stop to protect against losses and close the position if necessary