Butterfly thread

[SillyWilly]

If you are looking to capture theta decay and are willing to manage deltas, why not trade the underlying and sell options for a delta neutral position? I don't like butterflys because I'm paying theta decay on my long legs.

I am then short way to much vega and also hold a ton of gap risk. NOT something I want to trade although studies show that is very profitable. Another thing regarding your ATR divergence. If I look at SPX ATR is it 30. Yet the 28 day implied vol is 13% = .13 * sqrt(1/365)*2660= daily move of 18....Would I not make money if I bot this and then delta Hedged at the ATR?

 

[SillyWilly]

For me personally, butterflies have kinda been the holy grail.

Having said that, I have never simply purchased a midpoint fly and waited for a target. I started there, like everyone else - then I went through the same path as others that have gotten deep into the strategy.

As it moves you want to further limit risk while exposing additional profitability. As max has said, consider time frames, ratios and additional spreads that limit downside and enhance the profitability chart. If this type of trading suits your personality and you spend the time to develop the techniques around the butterfly, the rewards can be quite significant.

Any places you suggest to get started in the right path?

 

[ktm]

Any places you suggest to get started in the right path?

Here was my path; this is in the context of spreads on very liquid products - for me, broad based indexes.

Put something on that has a decent risk/reward. Learn everything about it...the behavior in flat/up/down markets, the path of decay etc...

Then I just think about it. I think about it when I'm driving. I think about it when I'm in the shower. I'm doing yard work and thinking about it. Where is my risk? What can I add to this position to alleviate that risk for relatively cheap. What is my profit potential and how can I lock that in or add to it...and what are the odds that the market will move a certain amount over this period of time.

How can I improve my risk/reward in the most efficient manner? I am constantly thinking...is there a better/cheaper way to eliminate risk and open myself up to higher profits.

Sometimes that means hedging expiries against each other, other times it means adding various spreads in strategic spots to achieve lowered risk or added exposure to the long side.

The path has to be yours because it has to fit your personality and your comfort level. There are things I do and believe in that you may not agree with...for instance I use no TA at all. Others use it religiously and find that it has tremendous value for them. I know it sounds simple, but another thing I've done over the years centers around taking most of the profit when it's available and closing shorts when they get super cheap - if I have a 40 point short SPX spread 80 points out of the money with 2 days left and it's a buck, I close it.

 

[KevinD]

Here was my path; this is in the context of spreads on very liquid products - for me, broad based indexes.

Put something on that has a decent risk/reward. Learn everything about it...the behavior in flat/up/down markets, the path of decay etc...

Then I just think about it. I think about it when I'm driving. I think about it when I'm in the shower. I'm doing yard work and thinking about it. Where is my risk? What can I add to this position to alleviate that risk for relatively cheap. What is my profit potential and how can I lock that in or add to it...and what are the odds that the market will move a certain amount over this period of time.

How can I improve my risk/reward in the most efficient manner? I am constantly thinking...is there a better/cheaper way to eliminate risk and open myself up to higher profits.

Sometimes that means hedging expiries against each other, other times it means adding various spreads in strategic spots to achieve lowered risk or added exposure to the long side.

The path has to be yours because it has to fit your personality and your comfort level. There are things I do and believe in that you may not agree with...for instance I use no TA at all. Others use it religiously and find that it has tremendous value for them. I know it sounds simple, but another thing I've done over the years centers around taking most of the profit when it's available and closing shorts when they get super cheap - if I have a 40 point short SPX spread 80 points out of the money with 2 days left and it's a buck, I close it.

A couple of questions if you don't mind?

1. Do you trade the flies all at once (like a pre-set fly order) or do you leg them?
2. How do you determine the width of the fly? Is there some criteria as far as underlying range, perhaps IV levels or just a matter of what is the most attractive from a R:R perspective?
3. Do you like to center the fly near as possible to the current underlying or do you go deeper OTM?
4. Finally, do you use some of the more creative strategies, like BWB's or mess with the ratios. (I ask because I see destriero does this frequently and I know that he is working with some advanced analytics to determine such things).

Thanks, sorry if this is too intrusive or if you don't feel like answering.

 

[ktm]

A couple of questions if you don't mind?

1. Do you trade the flies all at once (like a pre-set fly order) or do you leg them?
2. How do you determine the width of the fly? Is there some criteria as far as underlying range, perhaps IV levels or just a matter of what is the most attractive from a R:R perspective?
3. Do you like to center the fly near as possible to the current underlying or do you go deeper OTM?
4. Finally, do you use some of the more creative strategies, like BWB's or mess with the ratios. (I ask because I see destriero does this frequently and I know that he is working with some advanced analytics to determine such things).

Thanks, sorry if this is too intrusive or if you don't feel like answering.

1) I have an initial structure that I place at a specific distance from expiration. No legging...everything all at once.
2) Some of it is based on the volatility at the time, but it's within a fairly tight range that I've adjusted over the years.
3) It's a bit of both...I use multiple spreads simultaneously.
4) I do use BWBs and off ratios depending on a number of factors. Destriero is a bit of a neurosurgeon and I'm probably a caveman, but we both get the job done.

 

[maximumpossiblesuffering]

I am then short way to much vega and also hold a ton of gap risk. NOT something I want to trade although studies show that is very profitable. Another thing regarding your ATR divergence. If I look at SPX ATR is it 30. Yet the 28 day implied vol is 13% = .13 * sqrt(1/365)*2660= daily move of 18....Would I not make money if I bot this and then delta Hedged at the ATR?

Sorry for not being clear on my ATR divergence versus implied volatility indicator. My observation was that when plotting ATR on VXX, sometimes ATR will precede a significant move in VXX. For example, if ATR starts declining over a period of time, say a few hours, and VXX then dips below a moving average of the same length the ATR is based on, that has been a reliable indicator for a big move as shown by very limited testing. A reasonable stop could be at VXX recent resistance. On stock indexes, this indicator seems to have some value for directional trades as equity index price direction is usually inversely correlated to its volatility. Furthermore, one may be able to optimize their option trading based on anticipated volatility changes.

I appreciate you starting this thread. It has stimulated my thinking on trading and am now enjoying an avalanche of ideas. Perhaps some of my new ideas will be keepers.

 

[Windlesham1]

Exit IS everything -trade what you are comfortable with, and read Van Tharp