231 Butterflies

[Corto]

I’ll start this thread hoping to help everyone who still has more questions than answers about these butterflies – definitely my situation. I’m sure I’ll gather more criticism than thanks, but hope to learn from it.

This may not be even close to the typical butterfly destriero was talking about for over a decade here, but this is something that makes sense to me and I’ll explain why in layman terms.

To begin with here is the RUT chart. I’m slightly bullish and overly cautious. For a short term trade I’m taking into account this weak support level at 1490 shown in red.

 

[Corto]

Now I’ll set this 231 PUT fly with all OTM strikes for March 1st expiration. It’s set for a $1.10 credit, I don’t know why it’s shown with a minus, but that is a different story. The credit is minor, but this doesn’t kill an account. Max loss is killing, but I think it’s not a big concern like it seems as things will go first through a profit zone before accelerating down that slope. Will show in next post. Ready to take criticism here.

The breakeven point at expiration is just outside of the 2SD window, a bit below the support level I was talking about and this is what I aimed for when choosing my strikes. I’m slightly bullish and overly cautious. And I think I’ll be happy if RUT moves against me.

 

[Corto]

Continuing here.

As time passes the P/L curve will start showing a wider profit area. Shown after 10 days here. Depending on where RUT is at that time, I’ll decide whether to close it or push my luck and wait a bit more.

Now please shoot.

 

[MrMuppet]

What is your edge? You've shown a way to modulate a P/L curve, but there unlimited ways to do so.

Why will your position make money and what are other guys missing to pay you for a position like that? If you can't answer that, this thread is a waste of time.

 

[stevegee58]

What's your plan if the market approaches your short strike or the market gaps down past it at open?

 

[destriero]

It's trading at a credit because of the (extended) width of the body to the outside wing. You would need to maintain the 1490/1505/1535 231P structure if you're limiting the risk to the debit paid. IOW, this would be trading at a debit if you were in the 1490/1505/1535 fly. Nothing wrong with the position as I'll often trade them at a credit, depending on stickiness. I understand that you went deep on the wing to get a credit, but you're not really being paid to do so.

Muppet, he stated that he was cautiously bullish. Why trade any spread? His edge? Do you think he filled at the offer?

 

[destriero]

lol corto's edge. It's already trading flat to a nickel debit. I'd kill it on any trade below 1522 cash and/or on 2/26/2019.

 

[tsznecki]

Hold on @Corto I don't understand. If you are bullish your fly should point the other way.

 

[Corto]

An edge can mean various things to different people. For me a simple setup that makes sense to me and can be set based on clear rules is part of the edge. I’m tired of running scans almost every evening in search of potential trade candidates. I would love to be able to concentrate on indexes only.

Aside from that I think the trade I’m showing has reasonable potential to stay out of trouble.

A while ago, El OchoCinco was showing some flies and got the question how he’s choosing the strikes. He admitted he simply adjusts the strikes until he gets the coverage he likes. I thought if Option Chief is happy with that, why would I twist my mind with the greeks? Despite being an engineer and getting through more math than I had ever asked for, when it comes to options I didn’t get to that level where greeks become second nature and given my age, won’t have time to get there. You need more than learning them, you need settling time.

True, for a bullish view it looks counter intuitive to have it this way. My feel is that if RUT goes down, volatility will increase more than if it goes up and the P&L curve will bulge accordingly thus giving me a chance to still close at a profit before reaching a deep loss.

Huge gap down at opening? Will eat the loss. I would only use a small fraction of the acct in a trade, so not a real disaster.

Now I have to admit that thinking about it again, a huge gap down at opening is more probable than a gap up, so a trade in the other direction may make more sense. This is why discussion is good.

 

[stevegee58]

You're risking $5K to make maybe $1.5K. Yes the theoretical max gain is $3K but that's very unlikely. You *will* hit max loss sooner or later but will the winners make up for it? You don't know that yet.