Delta Hedged Put Butterfly - The road to 50% APY

[ironchef]

* 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.

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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

Do you trade butterflies? If so, why and if not why not.

By the way levered beta can be very profitable this bull market. But what if the bull goes home will butterflies be better when that happens?

 

[ironchef]

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.

First of all, I do appreciate your posts. All very helpful and relevant to someone trying to learn butterfly.

Second, can you explain why the butterfly is a good trade all around? I find it very difficult to model and analyze compare to single legs. Maybe I don't have all the tools?

 

[Longshot520]

First of all, I do appreciate your posts. All very helpful and relevant to someone trying to learn butterfly.

Second, can you explain why the butterfly is a good trade all around? I find it very difficult to model and analyze compare to single legs. Maybe I don't have all the tools?

Thanks, appreciate it.

Second, I like butterflies due to the way they allow you to structure your trades. I find them much easier to be profitable, especially in higher IV environments, than say credit spreads. I also find it fascinating to watch how the structure of the fly alters the risk. iI seems like a good way to learn more about the mechanics of options and their greeks.

I use OptionVue for mine and it models them pretty well, at least as far as I need it to.

 

[srinir]

Do you trade butterflies? If so, why and if not why not.

By the way levered beta can be very profitable this bull market. But what if the bull goes home will butterflies be better when that happens?

I do trade SPX fly., but I reject the notion that it is a income trade as portrayed in this cottage industry. Butterfly is just another structure to express your views. I don't do endless adjustment as they present.

Anyway, it is OP's journal. I have already cluttered enough.

 

[Windlesham1]

never had much success with 'flies -delta neutrality means no risk but profits can be pretty thin and then you have PIN risk

 

[sonoma]

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.

The effect of the initial fly will remain throughout the life of the position, whether you erase individual contracts with adjustments or not. Adjusting is simply adding additional positions to achieve another goal, given a new set of circumstances. The above points are why other posters are trying to force you to think about the initial position and the view it expresses and whether the fly at at the moment you trade it represents some type of edge. Otherwise, you should simply view the initial trade as inheriting someone else's inventory and now you're going to make the best of it going forward.

 

[Longshot520]

The effect of the initial fly will remain throughout the life of the position, whether you erase individual contracts with adjustments or not. Adjusting is simply adding additional positions to achieve another goal, given a new set of circumstances. The above points are why other posters are trying to force you to think about the initial position and the view it expresses and whether the fly at at the moment you trade it represents some type of edge. Otherwise, you should simply view the initial trade as inheriting someone else's inventory and now you're going to make the best of it going forward.

I can live with that for now. I am still trying to find the best IV parameters for entry that raise my PoP by 21 DTE. Hope the public forum will help me find it.

 

[Longshot520]

Anyway, it is OP's journal. I have already cluttered enough.

By all means clutter if it's a valid premise and thought process. I want people to say what they think of the trade and my thoughts on it. Need to learn.

 

[ironchef]

Thanks, appreciate it.

Second, I like butterflies due to the way they allow you to structure your trades. I find them much easier to be profitable, especially in higher IV environments, than say credit spreads. I also find it fascinating to watch how the structure of the fly alters the risk. iI seems like a good way to learn more about the mechanics of options and their greeks.

I use OptionVue for mine and it models them pretty well, at least as far as I need it to.

I do trade SPX fly., but I reject the notion that it is a income trade as portrayed in this cottage industry. Butterfly is just another structure to express your views. I don't do endless adjustment as they present.

Anyway, it is OP's journal. I have already cluttered enough.

Thank you both for your replies.

I finally set up an Excel spreadsheet and started to run through some parameters. Did some very simple backtest with SPY. There is no free lunch, I still needed an opinion for it to come out positive. The most attractive part though is downside risk is bounded.

I have much to learn.

 

[ironchef]

I do trade SPX fly., but I reject the notion that it is a income trade as portrayed in this cottage industry. Butterfly is just another structure to express your views. I don't do endless adjustment as they present.

Anyway, it is OP's journal. I have already cluttered enough.

Another stupid question for you and OP:

Running through my Excel, the fly outcome still depends on my opinion. 132 seemed to have a better R:R than 121 and lower debit to start, so why not 143, 154 ... flies?

I am not lazy and want an easy answer. I can loop through all the scenarios, but when I do that I can only see the trees instead of the forest.

Best regards,