I'm finding I favor more that 1:2:1 for longer butterfly plays 45 DTE type stuff. I can set up a larger profit window for the trade than the more weekly pinning plays. Have been looking at the VXX putting on 45 DTE call butterflies as a hedge against the put shorting part of my portfolio. For example VXX FEB 26 16-24-32 (1:2:1) .98 debit. But I'd like to find more reasoning for favoring traditional over modified set ups for fly selection. I like with the 1:3:2 you can take off the vertical or add it to a 1:2:1 to create the spread.
Alpha Wolf
- Thread starter BeautifulStranger
- Start date
I prefer the 2-3-1 structure when I’m concerned about increasing volatility and or range expansion. It is annoying to have the price move to the body of an ATM fly the same day or a day after putting on the spread. Last year, I bought a longer term OTM fly on silver only the see the body get hit in a couple of days. I netted a tick, enough for a suppository!
I am still going back and forth on what is the best play to play various scenarios, as almost half my trades are closed within a day (Mostly losers), making a simple long option most efficient in a lot of cases. I might give ORATs a try and see which structure is best overall for each of my setups and trading style. If I go this route, I will post findings here.
I'm liking you're thinking on this for the 2:3:1. Am going to look at some set ups with these today.
A quick thought as I dig into this. The 2:3:1 for a butterfly set up is going to cost more to initiate but have a fatter R/R. But I'm thinking a management tool is if a blow up and through occurs you could sell the vertical of another guts option and buy the far wing leaving you balanced with a 2:4:2 and if the premium sold equals the initial debit paid you should be risk free. Unless I'm missing something. Will be eyeing a 2:3:1 set up looking into next week.
Exited FDX 2-3-1 fly at $8.45 this morning. Cost was $4.02. If I had multiple contracts, I would have maintained a partial position.
Exited FSLR 1-2-1 fly at $1.91. Cost was $1.58. Here, too, I would have maintained a partial position if I had additional contracts.
I noticed the spreads on these options were particularly wide in the first thirty minutes of trading. Understandable because of volatility at that time of day, but it makes exiting a position quickly impractical. It may be best to hedge unwanted exposure in the underlying instead and close the positions a little later in the day when things have quieted down a bit. In addition, I need to avoid option spreads on underlyings that don’t have consistently high volume.
Now Flat. Account up about .5% this week so far.
Some minor tweaks will be diligence in scaling in and out of positions and to better quantify the quality of prospective trades. DTEs for option spreads shall be between 4 and 8 trading days. I will now structure my flys such that my breakeven price upon expiration will be similar to the current price of the underlying and placing an order to open. The body will generally between 20 to 25 delta, unless IV rank is low and I’m anticipating range expansion. In that case, I will simply go long 45 delta or so options.
Exited FSLR 1-2-1 fly at $1.91. Cost was $1.58. Here, too, I would have maintained a partial position if I had additional contracts.
I noticed the spreads on these options were particularly wide in the first thirty minutes of trading. Understandable because of volatility at that time of day, but it makes exiting a position quickly impractical. It may be best to hedge unwanted exposure in the underlying instead and close the positions a little later in the day when things have quieted down a bit. In addition, I need to avoid option spreads on underlyings that don’t have consistently high volume.
Now Flat. Account up about .5% this week so far.
Some minor tweaks will be diligence in scaling in and out of positions and to better quantify the quality of prospective trades. DTEs for option spreads shall be between 4 and 8 trading days. I will now structure my flys such that my breakeven price upon expiration will be similar to the current price of the underlying and placing an order to open. The body will generally between 20 to 25 delta, unless IV rank is low and I’m anticipating range expansion. In that case, I will simply go long 45 delta or so options.
$90 net profit on bearish ES put fly today. I am flat going over the weekend.
After reviewing this week’s trading performance, several issues stood out:
1. The structuring of my trades are often not consistent with my intended holding period. For example, I day traded 3 ES ‘flies this week. While all three of these trades were profitable, my cost of trading this way is very high compared to simply buying a single option or even trading the underlying. I have a scalping mentality right now and need to better adjust to a swing trading mindset with option spreads. At least I held my single name option spreads for a few days.
2. I am trying to be “Too perfect” with trade entries.
I have a $500.00 stop loss level for each trade idea, allowing me good “Wiggle” room. Why miss a trade over a tick or even a few points? Taking a 50% shot to avoid a potential of $100 in heat and missing a $600 profitable trade is not exactly perfection, is it?
3. I am trying to be too perfect with trade management.
My net return this week was slaughtered by hedging losses. From now on, I will stop “Dynamically hedging” my positions unless I am unable to watch position or want to reduce overnight risk when highly utilizing account equity.
4. My average utilization of equity was 4.8% of equity, reducing potential return on equity.
While most of my positions, such a weekly options, involve high effective leverage, I can safely increase my utilization of equity, especially when trading less correlated instruments or strategies.
5. My order execution methods need improving.
I simply need to spend more time working my orders for better pricing. I will look at the effect of price improvement versus placement of my option spread strikes.
6. My trade idea generation could be more consistent.
Although I’ve been generating some solid trade ideas, I have missed out on some major plays. I need to set more time aside and actively think about the day’s happenings.
7. There are important nuances of my setups I am not consistently applying.
While my setups are very well defined, i tend to treat them the same. This leads to inefficient or missed entries. Age of trend, as measured by number of corrections, is a key attribute of where I want to look for entries. Specifying setups as trend reversal breakouts, minor first corrections, and major second and later corrections are fundamental to the efficient trading of my system.
The trading account associated with this journal was up $342, or .68% this week.
While I will post the official IB generated statistics at the end of the month, my weekly statistics are as follows:
Average utilization of equity: 4.8%.
% trades profitable: 35.2%, 66.7% without hedging.
Profit to loss ratio: 2.84:1, 2.87:1 without hedging.
Total trades: 17.
Note: Net cost of hedging was $399.00, or more than my overall net performance this week. To add insult, none of my positions faced significant heat, with my losers being closed out for technical reasons instead of being stopped out.
I will increase my initial stop levels to 2% of equity on ideas a realized full loss is more likely to be worse case scenario rather than a normal trade management situation in order to improve my utilization of capital. As my metrics improve, I may increase my risk tolerance further.
Today’s performance and ending account balance:
After reviewing this week’s trading performance, several issues stood out:
1. The structuring of my trades are often not consistent with my intended holding period. For example, I day traded 3 ES ‘flies this week. While all three of these trades were profitable, my cost of trading this way is very high compared to simply buying a single option or even trading the underlying. I have a scalping mentality right now and need to better adjust to a swing trading mindset with option spreads. At least I held my single name option spreads for a few days.
2. I am trying to be “Too perfect” with trade entries.
I have a $500.00 stop loss level for each trade idea, allowing me good “Wiggle” room. Why miss a trade over a tick or even a few points? Taking a 50% shot to avoid a potential of $100 in heat and missing a $600 profitable trade is not exactly perfection, is it?
3. I am trying to be too perfect with trade management.
My net return this week was slaughtered by hedging losses. From now on, I will stop “Dynamically hedging” my positions unless I am unable to watch position or want to reduce overnight risk when highly utilizing account equity.
4. My average utilization of equity was 4.8% of equity, reducing potential return on equity.
While most of my positions, such a weekly options, involve high effective leverage, I can safely increase my utilization of equity, especially when trading less correlated instruments or strategies.
5. My order execution methods need improving.
I simply need to spend more time working my orders for better pricing. I will look at the effect of price improvement versus placement of my option spread strikes.
6. My trade idea generation could be more consistent.
Although I’ve been generating some solid trade ideas, I have missed out on some major plays. I need to set more time aside and actively think about the day’s happenings.
7. There are important nuances of my setups I am not consistently applying.
While my setups are very well defined, i tend to treat them the same. This leads to inefficient or missed entries. Age of trend, as measured by number of corrections, is a key attribute of where I want to look for entries. Specifying setups as trend reversal breakouts, minor first corrections, and major second and later corrections are fundamental to the efficient trading of my system.
The trading account associated with this journal was up $342, or .68% this week.
While I will post the official IB generated statistics at the end of the month, my weekly statistics are as follows:
Average utilization of equity: 4.8%.
% trades profitable: 35.2%, 66.7% without hedging.
Profit to loss ratio: 2.84:1, 2.87:1 without hedging.
Total trades: 17.
Note: Net cost of hedging was $399.00, or more than my overall net performance this week. To add insult, none of my positions faced significant heat, with my losers being closed out for technical reasons instead of being stopped out.
I will increase my initial stop levels to 2% of equity on ideas a realized full loss is more likely to be worse case scenario rather than a normal trade management situation in order to improve my utilization of capital. As my metrics improve, I may increase my risk tolerance further.
Today’s performance and ending account balance:
fly butterfly fly. nice!
What positions are you hedging and how? Curious how it relates to my own hedging concepts.
I hedged my day traded ES 2-3-1 flys! Excuse me for a moment while I leave the room in shame.
Ok, I’m back. From now on, the only hedges I will be doing is to reduce overnight exposure if I have large positions on.
Part of the underlying problem is my signals are tuned for intraday trading rather than swing trading. Stocks seem to be easier to swing trade because their more limited trading hours than futures contracts. With ES, there are more opportunities for me to feel the need to hedge “Obvious” short term moves against my position. The problem is, I have not been vigilant in lifting those hedges. The way I have been hedging has me effectively trading against myself.
A reasonable solution would be for me to move away from butterflies for expected intra-week trades and use long calls or puts for my trade ideas. Almost 90% of my trades this week lasted less than a day, making theta cost a minor consideration. On a large profitable options trade I want to hold overnight, I could “Verticalize” it for reduced overnight exposure and manage the new structure according to the next days’s action.