Butterfly Lovers, please tell me your secrets?

R

rselitetrader

Hi all:

I have read that many of you enjoy trading butterflies, but I have not found any suitable candidates yet. I want to show an example; please enlighten me what I am missing.

Thank you immensely!
-----
Platform and data source: IB TWS Options Trader, ivolatility.com

Underlying: Goodyear Tire and Rubber (GT)

Reason: GT's stock chart show slow rise over 26 weeks; therefore, in one month, it may not rise much; if I choose middle strike slightly higher, then in one month, GT may actually be very close to the middle strike. I plan to use long put butterfly in the month of April.

Data from IB (after hours on sunday evening, only Last Prices are available):

GT is at $31.19
Apr 30 put: $0.50, 37% IV
Apr 35 put: $3.90, 40% IV
Apr 40 put: $8.85, 65% IV

In April, IB showed that only these three put have values, and Apr 40 call has no data and thus I cannot do call butterfly. (10PM Sunday now.)

My problem with the butterfly in this example, as with my other potential butterflies, is the adverse risk:reward ratio and narrow profit range. In this example, the total debit is

(0.5 + 8.85 - 2 * 3.9) = 1.55 not counting bid-ask spread.

Break evens are 31.55 and 38.45, or a range of 6.90. The maximum profit is 5, with only 5:1.55 ratio. If bid-ask spread and commissions were included, it is more likely to be 5:2.5 or 2:1. Because the price now is at 31.19, I am already in the loss territory.

My question is, how do you butterfly lovers do it? Should I consider volatility smile/skew/term structure? What else am I missing?

Once again, thank you for any suggestions.
 
Most don't initiate flies with large delta exposures. The SD implied by the atm straddle suggests a $2 range to expiration and you'd like a better return on a defined-risk position with 35% volatility? The spread is 3:1, so your 2:1 assumption is poorly-derived.

There is no appreciable skew in the options, so use a single vol-figure. Calls are puts + spot. Bid-ask vol-spreads on teenies can exceed the fairval volatility. So use the mid of the otm option of the chosen strike to derive the implied vols.
 
Quote from atticus:

Most don't initiate flies with large delta exposures. The SD implied by the atm straddle suggests a $2 range to expiration and you'd like a better return on a defined-risk position with 35% volatility? The spread is 3:1, so your 2:1 assumption is poorly-derived.

There is no appreciable skew in the options, so use a single vol-figure. Calls are puts + spot. Bid-ask vol-spreads on teenies can exceed the fairval volatility. So use the mid of the otm option of the chosen strike to derive the implied vols.
More...

sounds like the God of Nazareth, to me, 'innit?
 
I'm no expert and I don't care for butterflies (I prefer condors for the wider profit zone) but here are my issues with your GT butterfly:

Because GT is closer to the 30p, it's a bullish position. And since we're fairly close to Apr. expiration, the 35p is near parity. You're getting no time premium offset and your ability not to lose is dependent on enough upside movement to offset the TP paid for the other two legs, let alone making a profit. Hence your observation of "already being in the loss territory."

"My problem with the butterfly in this example, as with my other potential butterflies, is the adverse risk:reward ratio and narrow profit range."

That's the nature of buterflies.

"The maximum profit is 5, with only 5:1.55 ratio. If bid-ask spread and commissions were included, it is more likely to be 5:2.5 or 2:1 "

The maximum value of the butterfly is 5, not the max. profit so you start at 2:1. And if commissions are affecting the position that much, you're paying too much.
 
You might consider doing the fly on RUT, or other ETF, not equities.

The shorts should be ATM, adjust the wings so that you are near delta neutral. Put it on as a spread, not leg in.

Exit strategy -- get out with a predetermined max loss (e.g. 20%).

Put it on 30-40 days prior to expiration, liquidate seven to 10 days prior, or when you earn 50-60%, whichever is earlier.

Dan Sheridan has a few webinars on CBOE on the butterfly -- one is coming up in the next couple of weeks, I believe.

Also Keith Fitz-Gerald gave an excellent seminar at moneyshow.com on the butterfly. "My Favorite Options Trading Tactics for Consistent Appreciation and Income" Also Randy Frederick
"Trading Option Butterflies and Condors" (have not hear this one yet).
 
Why trade FLYs?
small sweet spot
8 commissions RT
8 slippage RT
and that's just for one lot.

The only Flys I would trade are way OTM flys that cost practically nothing to get in.
 
Quote from Tums:

Why trade FLYs?
small sweet spot
8 commissions RT
8 slippage RT
and that's just for one lot.

The only Flys I would trade are way OTM flys that cost practically nothing to get in.
More...

Yes, OTM flys that cost practically nothing to get in also has the probability of success of practically none.

OTM butterfly is a cheap lottery ticket.
 
I prefer calendars -- less slippage and commission. fly makes sense as alternative to calendar where there is high volty or skew.
 
Also the same 8 leg RT commissions exist on an OTM FLY and they are a bigger % of the cost...

Quote from atozcom:

Yes, OTM flys that cost practically nothing to get in also has the probability of success of practically none.

OTM butterfly is a cheap lottery ticket.
More...
 
You must log in or register to reply here.
Back
Top