Delta Hedged Put Butterfly - The road to 50% APY

[Longshot520]

There is a cottage industry in these type of butterfly trades marketed in interesting names. This is by former used car salesman marketed as M3, slightly different version ROCK etc. Each version comes with course work, weird rules, mentorship starts from $1200 and up, monthly membership $120 and up. Just tweak something like add calendar on the upside, it will be another $1200. It is pretty sad

No they don't evaluate for anything. It is on entire time, adjusting with all kinds weird rules as they go along

There is a pretty growing industry using the butterfly for the "common man", but I would argue that's because the butterfly is a good trade all around. I am not doing any type of coursework, mentoring, group membership, or anything of that sort. I just like this trade because the loose trading parameters established for management of the greeks/IV really do seem to be effective, and it's a great way to learn more about the mechanics and elegance of the butterfly trade.

Jean Paul Mitchell was in a gang and lived out of his car before becoming a multi-millionaire. I don't think it's fair to judge somebody based on a job they had in the past. Locke's M3 has a pretty good record over the last decade, and whether he designed rockets or delivered pizzas, if the trade works, it works.

 

[srinir]

There is a pretty growing industry using the butterfly for the "common man", but I would argue that's because the butterfly is a good trade all around. I am not doing any type of coursework, mentoring, group membership, or anything of that sort. I just like this trade because the loose trading parameters established for management of the greeks/IV really do seem to be effective, and it's a great way to learn more about the mechanics and elegance of the butterfly trade.

Jean Paul Mitchell was in a gang and lived out of his car before becoming a multi-millionaire. I don't think it's fair to judge somebody based on a job they had in the past. Locke's M3 has a pretty good record over the last decade, and whether he designed rockets or delivered pizzas, if the trade works, it works.

Butterfly with some kind of delta hedge was there long before Locke.

 

[Longshot520]

How are you gauging the expected value of the trade? I.e. do you look at richness/cheapness of implied vols, skew etc.

It's a pure time trade with planned capital and established P/L I suppose. I am not sophisticated enough yet to use these sorts of things to my advantage, which is exactly why I sacrifice profit for the call hedge. I need a wide berth. In backtesting, volatility really came into play mainly during large upmoves when the IV crush would take my nice, smooth t+0 line and really collapse it on the upside.

 

[Longshot520]

Butterfly with some kind of delta hedge was there long before Locke.

I'm sure it was! I just stumbled over his teaching of it. The analysis of this particular trade has taught me a lot so far, and Locke has a good way of teaching it. By all means please point out flaws in the methodology, but I think you've made your point that you simply don't like the cottage butterfly industry. Point taken.

 

[sle]

It's a pure time trade with planned capital and established P/L I suppose.

If you are not trying to gauge if some parameter is rich or cheap, where do you think the positive expectation comes from? It's a skew trade, primarily and as such, you want to do it when skew is rich, especially if you are hedging delta. As a side question, why do you want to be delta neutral and are you hedging your delta inclusive of your vanna (i.e changes in vega with changes in spot)?

Anyway, I thought @srinir was using car salesman metaphorically, but apparently that's exactly it:
https://www.lockeinyoursuccess.com/about-2/

As a young man I began my career as an auto-mechanic and worked my way up to opening my own BMW repair business.

 

[srinir]

By all means please point out flaws in the methodology

* Basic flaw is as @sle pointed out, trade is taken with out evaluating richness/cheapness of the fly.

* Why use 90D ITM call with microstructure issues, when one can buy Future and short 10D puts

* He uses fixed width strike (40?) with 10 points below the current price to structure the trade and for back test. RUT was 400 was 10 years back, now it is 1600. All these are designed to simplify for masses.

* It is always on, so the performanance needs to be compared with levered beta. You don't need all the fancy software with all kinds of weird rules to evaluate. CBOE has done it for you.

So all the performance came from beta hedge. You would have better off just levering the beta itself.

* There is nothing special about different beta overlay (90D call [M3], Put verical [Rock?], Calendar), but each one costs about additional $1200 and up.

Used car salesman with snake oil is deadly combination

 

[Option_Attack]

Yeah it's easy to see, even with my simple data, that it should have done well the last few years. But then most strategies worked also. How well will it work when shiite is hittin' and markets are crazy, spreads are a mile wide, you have to get adjustments done in a hurry, etc. Who knows?

But as SLE and others have alluded to, where's the edge? Without skew expectations and other considerations it is just another "do it every month (and on vacation!) and you will be a zillionare..." kind of trade. I guess like always it works until it doesn't.

Anywho Good luck and good trading to all!

I appreciate the analysis. Adjustment and/or adding call/put verticals to fine tune the greeks are a pretty decent part of the trade to account for moves, and in backtesting over the last 5 years, there were very few large moves that couldn't be traded around for at worst a small loss. We'll see.

 

[Longshot520]

If you are not trying to gauge if some parameter is rich or cheap, where do you think the positive expectation comes from? It's a skew trade, primarily and as such, you want to do it when skew is rich, especially if you are hedging delta. As a side question, why do you want to be delta neutral and are you hedging your delta inclusive of your vanna (i.e changes in vega with changes in spot)?

Anyway, I thought @srinir was using car salesman metaphorically, but apparently that's exactly it:
https://www.lockeinyoursuccess.com/about-2/

I would guess the positive expectation comes from the fact that I'm taking only a small portion of the max profit, and the trade is designed to stay theta positive. Ideally entry would happen after a sharp spike in IV, but during periods of extended lower volatility, I haven't seen that be an issue in profiting from the trade unless volatility REALLY spikes. I am definitely looking to learn more about how the skew can eek out more upside though (and prevent losses) depending on the timing of the trade. As a monthly "income" trade though, it sounds easier said than done when trying to time entries based on a rich vertical skew?

I want to be delta neutral so the position withstands large moves with little need to worry or adjust. I use the T+0 line as a visual to that. I should mention that as the market moves, I will gladly withstand substantial negative delta as long as I am "under the tent" so to speak in the visual analysis. Positive delta worries me more. I can't speak to what I'm doing in relation to vomma, and would love any insight as to how it can be used more effectively.

Thanks for the questions.

 

[Longshot520]

* Basic flaw is as @sle pointed out, trade is taken with out evaluating richness/cheapness of the fly.

* Why use 90D ITM call with microstructure issues, when one can buy Future and short 10D puts

* He uses fixed width strike (40?) with 10 points below the current price to structure the trade and for back test. RUT was 400 was 10 years back, now it is 1600. All these are designed to simplify for masses.

* It is always on, so the performanance needs to be compared with levered beta. You don't need all the fancy software with all kinds of weird rules to evaluate. CBOE has done it for you.

View attachment 198456
So all the performance came from beta hedge. You would have better off just levering the beta itself.

* There is nothing special about different beta overlay (90D call [M3], Put verical [Rock?], Calendar), but each one costs about additional $1200 and up.

Used car salesman with snake oil is deadly combination

Can you explain why that is a fatal flaw? I have seen the trade profit in both high and low IV. I would imagine there are parameters where one could profit faster/more because of IV conditions (or lower risk), but if the profit target is but a small portion of the overall profit potential of the fly, can richness/cheapness impact it THAT much??

It looks a lot less complicated at first glance would be my answer to the 90D call. Could there be that much gain/less risk with your method?

50 width is standard, but there are plenty of times when a BWB or even a condor are more appropriate. I don't disagree there were definitely some "rules" that Locke tried to apply to make it more palatable to the everyday person, but he's pretty clear that the M3 is not "rule" based. I will structure my trades accordingly to get to the proper greeks, however that may need to happen.

It appears as if you're judging the position from a "entry and hold" type performance, with no adjustments or consideration to them. That's way off base and not a valid measurement. It's inaccurate to simply compare the trade from the start to the SPX. There are more facets that will impact the performance.

Yes, you've said how expensive the programs are. Many times. We get it. I don't pay for any of them, nor will I. I'm just trying to learn from a trade that offers a very forgiving methodology and has a good track record for profit.

Thanks for your insight.

 

[Longshot520]

Yeah it's easy to see, even with my simple data, that it should have done well the last few years. But then most strategies worked also. How well will it work when shiite is hittin' and markets are crazy, spreads are a mile wide, you have to get adjustments done in a hurry, etc. Who knows?

But as SLE and others have alluded to, where's the edge? Without skew expectations and other considerations it is just another "do it every month (and on vacation!) and you will be a zillionare..." kind of trade. I guess like always it works until it doesn't.

Anywho Good luck and good trading to all!

I agree 100% on the first part. I would the think the large width of the strikes coupled with the hedge would help. Locke has a lot of videos showing the trade in swings of 100+ points over a short time period coming in OK, but in the end it's still a trade, requiring steel balls and good intuition I'd suppose.

Isn't the nature of the trade the edge? As long as theta is positive and the greeks are under control, the trade is likely to profit. Again, any insight on how to exploit the skew for better results would be much appreciated.

Thanks