A market absolute is "No free lunch." Just because it is multi leg and has pos theta and low delta, etc, doesn't give it an edge. Options don't work that way. Every hedge fund in existence would trade and arb the f*&k out of it if it was, somehow, a "natural market edge." What will happen, eventually, is that the market will take back what it has seemingly given so easily.
Delta Hedged Put Butterfly - The road to 50% APY
- Thread starter Longshot520
- Start date
Yes, agreed, however the nature of the adjustments and their greek structure is what is meant to consistently provide a profitable trade (supposedly). I would suppose the edge comes from the fact that since IV is overstated 99% of the time, a properly managed position like this should be able to exploit theta decay while avoiding losses through proper greek management.
The purpose of the journal is to test that theory, my interpretation of it, and keep it honest. If it blows out, it blows out.
Don't get me wrong, I'm very interested in how you do. Adjustments to the original trade, (not to be glib) IMHO is called Trading. So if your Trading is good enough and you avoid the big losses or even the small nibbles if you don't hit enough winners, then it should work fine.
Positive expectation in certain option trades, like writing monthly covered calls because IV might be overstated, can be seen in BXM and others. But looks to be under what most traders need to survive I would think. And pumping up short options to high risk levels, well, we all know what will happen...
Positive expectation in certain option trades, like writing monthly covered calls because IV might be overstated, can be seen in BXM and others. But looks to be under what most traders need to survive I would think. And pumping up short options to high risk levels, well, we all know what will happen...
That's the plan my man!
I don't think the overstated IV is necessarily the only edge, I just don't have the sophistication in the options world to really describe the nuances. The trade really does seem to revolve around the fact that theta decay increases dramatically towards expiry, and good *trading* coupled with good management/psychology should produce enough winners/profit to offset the losers. Frankly I'm waiting for @destriero to come in here and eviscerate the entire trade, in hopes I can learn a bit more from the pieces of the critique, like I'm doing from you all so far. Sorta like learning how to punch from being knocked out by Mike Tyson.
The lowest profit year for Locke's M3, for both him and other traders I've discussed it with was 2016. I need to do more extensive backtesting and analysis of the various factors in that year to determine what crippled it.
I don't think the overstated IV is necessarily the only edge, I just don't have the sophistication in the options world to really describe the nuances. The trade really does seem to revolve around the fact that theta decay increases dramatically towards expiry, and good *trading* coupled with good management/psychology should produce enough winners/profit to offset the losers. Frankly I'm waiting for @destriero to come in here and eviscerate the entire trade, in hopes I can learn a bit more from the pieces of the critique, like I'm doing from you all so far. Sorta like learning how to punch from being knocked out by Mike Tyson.
The lowest profit year for Locke's M3, for both him and other traders I've discussed it with was 2016. I need to do more extensive backtesting and analysis of the various factors in that year to determine what crippled it.
I am no expert compared to some here.
Traditional Bfly and RR is the primary structure to capture Skew. In trading you need to evaluate richness/cheapness to place a trade, since these are not buy and hold investments. No one holds Bfly till expiry, almost all Bfly traders exit the trade earlier. So your argument of small profit target does not apply.
If constant adjustment is needed, then you don't have good predictive model to forecast price and vol. You would be better off to place the short strike, where you can predict the price will go and then take off the trade at that point.
90D call has wider b/a and is slightly difficult to fill. He didn't point out that just because of the same reason you quoted "less complicated".
As i pointed out, when you backtest "50 width standard" over the years, you are backtesting varying delta Bfly over the years. 50 width when RUT was at 400 looks whole lot different than 50 width now.
There were lot of rules, when i saw the presentation,like wait for some days, look for this delta/theta ratio, move up the entire Bfly when it goes up by X points etc.
As i said earlier, if you have good predictive model then all these adjustments (and lots commissions) are unnecessary. Constant moving up and down means you are basically doing trend trading. You are better off with trend trading.
My 2 cents. Good luck
I appreciate the insight. You're right that I simply don't have a good model for prediction at this time. However price isn't the sole determining factor in my adjustments, the primary drivers will be the greeks, namely delta. The presentation your discussing sounds like Locke's Bearish Butterfly, which I am not a fan of. While offering a higher yield, and definitely has a place, I dislike martingaling.
Anyway, time will tell. Thanks again for help.
3/1 -
Greeks look good:
Graph looks good
Nothing for today. More upside means I need to watch Vega at this point.
Greeks look good:
Graph looks good
Nothing for today. More upside means I need to watch Vega at this point.
If you are short, theta seems to defy all laws of decay. But when long, nothing moves faster! 
A few more weeks of (mostly) non-movement like we have had lately, and you'll be biggly in da money!
A few more weeks of (mostly) non-movement like we have had lately, and you'll be biggly in da money!
If you are short, theta seems to defy all laws of decay. But when long, nothing moves faster!
A few more weeks of (mostly) non-movement like we have had lately, and you'll be biggly in da money!
It is funny how that works isn't it??