BWB questions

E

Eliot Hosewater

[Carried over from the Married Puts thread]

OK, so what is a BWB? I've seen some references to putting them on at zero debit, but I assume there is must be some risk.
 
Note: I haven't read the JL Lord books which this is from, but am part of another group which there has been discussion and examples given.

A BWB is essentially a butterfly with the far OTM leg pulled far out. There's been discussion here about it. It would look something like,

B 1 SPY 130 call
S 2 SPY 132 call
B 1 SPY 136 call

The risk is from the far tail being non symmetrical from the close tail. The max risk in this position is $200 (+/- debit/credit) at expiry, with the graph sloping down from 132 onwards to loss territory. The 0 debit is an illusion, you will have to put up margin as per the sold call vertical. But what is commonly meant by 0 debit or credit is that if the 2 sold calls covers your 2 long calls, the position has no downside/upside depending on calls or puts. If entered for a debit, options sold doesn't cover options bought, then there is a slight downside/upside..

Hope this helps.
 
Thanks. Is this a semi directional position, i.e. you hope the stock stays relatively stable, but if it moves you hope it moves down (in this case), or towards the lower risk side in general?

I guess I'm asking why you would do one of these as opposed to a normal butterfly.

Edit: For that matter, why would you do any butterfly over an iron condor?
 
bwb stands for broken wing buterfly. As jj90 said, the far otm wing leg is bought to reduce margin, iow there's asymmetrical distance between strikes. Generally used for indices. On the P/L graph the trade looks uglier than it really is. It can be placed for a credit and in essence is a backspread with wing protection (the cheaper the wing leg the larger your credit) or you can look at it as long a debit spread and short a credit spread with both short legs at the same strike. Advantages are time decay is in your favour, cheap to place (if placed for a credit , the bwb can expire worthless and you still make money vs conventional long fly), and, if you pick your strikes well, low risk. The hardest bit is selecting the strikes in your favourite index. Placed one last month for a debit of $20 and got lucky when mnx set around short strike for profit of $240, unfortunately only had 4 of them, but I'm still learning this strategy. I placed another for a credit of $300, but it expired worthless and I kept the credit. Others I have done for small debits and they expired worthless, but as I said the debits were tiny ($15). Overall, the strategy is a lot more complex than what's been described so far, but a good rule of thumb is to try to place them for a credit with the short leg at least 5% otm and as much separation between debit spread legs as possible (2 or more strikes), which is generally easier for put bwb in high vol environment.
Best
daddy's boy
 
Quote from Eliot Hosewater:

Thanks. Is this a semi directional position, i.e. you hope the stock stays relatively stable, but if it moves you hope it moves down (in this case), or towards the lower risk side in general?

I guess I'm asking why you would do one of these as opposed to a normal butterfly.

Edit: For that matter, why would you do any butterfly over an iron condor?
More...
It's a directional play which you can play both ways - place a call and a put bwb at the same time (like a strangle) - which should work out well if you can get a credit for both. But beware of the strike selection. As I said, the strike selection is absolutely critical and can turn a low risk trade into a high one if you get them wrong.
daddy'sboy
 
Just to add on to daddys boy's posts, you have to look at a BWB as essentially a ratio spread with defined risk. Managing the shorts is the critical part, as most of the time you will be selling into the steepest part of the gamma slope and if you get them wrong....

Knowing your index is important too. SPX has decent premium month to month, even when vols are low. SPX is far less a mover then say NDX. Of course NDX has more premium. Just a couple of examples.
 
Right now is a very difficult time to do 1-2-1 BWBs because of the low implied volatility. One of the ways around this is to look at non-equity indexes such as the XAU with a current IV that is 50% greater than the stock indexes. Attached is a partial risk graph done a few days ago -- a 1 145P -2 140P 1 127.50P done for a credit of $21 with the XAU at 147.68.

Regarding the choice of short strikes, I believe there is a range of strikes and not just one that is optimal. The closer to the money you are the more credit you get, and sometimes (like now) you have to be close to the money to even get a credit. So there is a trade-off between the credit you receive and the risk of being too close to the money.
 

Attachments

There is a saying we have all heard: "Beggers can't be choosers".
That applies to our desire to get a credit and the choice of strikes. In times like these we are begging for a credit. That forces us to get closer and closer to the money because most strikes would result in debits while only close to the money would there be credits. That may not work in times like these (low IV) when even close to the money there are no credits doing Sep expirations on the equity index options. So when moving through the strikes doesn't work, the next recourse is to change the ratio to 1-3-2 for example.
Both of these strategems, while giving us the credit we beg for, also increase the risk of the trade.
 
I've been researching this a little bit more, and came up with an embarassingly silly question. This is specifically about the TOS analyze screen, but probably applies to other risk profile tools as well.

When I put in a simulated trade, does the graph take into account any credit or debit from opening the position? For example, I have the following BWB on Sep calls on SPY up now:

B 1 129
S 2 130
B 1 132

TOS says I can do it for a credit of .30. When I put up the risk profile it shows the max loss line at -700. Does that mean an overall risk of $700, or would it be ($700 - $300) = $400? IOW, should I move the graph up or down by the amount of the original credit or debit?

I combined the above position with puts at 129/131/132 for an total credit of .60. The risk graph had the total loss at -600, so would that be a free trade not counting commissions, or is there still $600 to lose? (BTW that's all changed during the time I typed this.)
 
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