Delta Hedged Put Butterfly - The road to 50% APY

[srinir]

From your OP

I am going to be trying a trade in 2019 that, when backtested, gives some pretty nice returns.
...

From there, I will monitor the greeks, making adjustments/adding/removing various option structures to keep my greeks in line with loosely established parameters.

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 .

Based on this you have mechanical model, which adjusts based on some fixed parameters.

My gut feeling is RUT wants to close the gap made back on 2/13, so I anticipate more downside, and this adjustment makes me feel better.

...
I should mention that as of today, I'll be using the EIOIO model until I can study a bit more about how the different models will react on a strong upmove/volatility crush. The EIOIO model called the downside much better today, so I see no reason to deviate from it until further notice.

Did today's greek's before adjustment violated your parameters? If it is a mechanical model, why are you introducing "gut feeling"?. Anticipating some price points is totally different trade.

Also If you backtested using "New Var" model, why are you giving up so early?. Probably you developed some parameters based on that model. If you switched to EIEIO model, those parameter numbers will be different

 

[Longshot520]

From your OP





Based on this you have mechanical model, which adjusts based on some fixed parameters.



Did today's greek's before adjustment violated your parameters? If it is a mechanical model, why are you introducing "gut feeling"?. Anticipating some price points is totally different trade.

Also If you backtested using "New Var" model, why are you giving up so early?. Probably you developed some parameters based on that model. If you switched to EIEIO model, those parameter numbers will be different

1) I don't have mechanical settings for the trade, it's not meant to be setup that way. There are loose guidelines revolving around the greeks, but the guidelines were designed by Locke (so he says) to encourage people to actually learn to trade and not blindly follow rules. The "graduate level" of the M3 trade is called the M21, which actually introduces technical analysis and such to better assist with entries and adjustments (among many other things). I don't own or plan to own the M21 system, but it would make sense to me that the M3 can yield better results with critical thinking around price action and charts. Maybe I'm wrong?

2) Again, no parameters around that model. The loose guidelines will still apply whether I'm using EIOIO or NewVar, I was just really taken aback by how off NewVar was compared to EIOIO. Given that the greatest risk to this trade is always to the downside, I find it more prudent to use that model for now, while maintaining the loose greek parameters of the trade.

 

[Longshot520]

No adjustments necessary today.

 

[Longshot520]

Well the RUT bounced right back up to 1540 where my original shorts were, go figure. Still, the call has me protected on the upside, and I'd rather be flat P&L with the possibility of an upward adjustment than had to have dealt with a $2k draw down (and the unknown of more downside) last week. I'll see how this bounce plays out, but for now just hanging in there.

Greeks today:

Still positive theta and negative vega.

Analyze graph:

Still looking OK. I usually let the upside get challenged more in the earlier days of a trade before adjusting. Delta is still well under my threshold and vega is still negative. If the market continues to rally, I'll be fine short term, but risk getting stuck in the "sea of death", which is the area to the right of the tent. In the past my t+0 line begins to sag in that area if I don't adjust, creating a larger and larger vega headache as time goes on if price sits there and I do nothing. We'll just have to see what the week brings.

 

[Longshot520]

Uneventful day. Pretty flat. My position remains right around the far right side of the profit tent. Delta is still very reasonable and vega is still negative, so I'm going to stay put for now. Any more upside is still hedged, but I'll be on the lookout for vega turning positive in the next few days if markets keep rising. As it stands currently, vega will turn positive right around 1560, in which case I'd most likely adjust the butterfly up 20 points.

 

[Longshot520]

So made an adjustment today, moving the fly right back up to the original 1540 body. My vega was on the verge of turning positive, and from a charting perspective, it really looks like RUT is trying to retest its previous high in the coming weeks. If it hang out too much between 1550 and 1600, my t+0 line will continue to sag outside of the profit tent. I'd rather adjust the whole fly up and keep some inert downside protection while catering more to the upside. The adjustment fixed my vega issue, however even after the fly adjustment, my delta was still a bit too negative for my liking given how more upside posed a problem sooner rather than later. To offset this, I bought 5 1490/1510 call verticals, which brought my delta closer to 0, while having minimal impact to my theta, gamma, and vega. The 1 1500 call also remains untouched.

Here are the new greeks:

and the new analyze graph:

I am OK having my downside risk a bit closer to the money due to the fact time decay will offset that, however I do not want to hold onto the vertical position too long. If price begins to drop fast however, the volatility expansion could make things ugly, and I don't want to be overhedged to the upside. I'm hoping a grind to 1600 followed by a rejection of the previous high is in order, to where I would liquidate the verticals if prudent, but we will see.

 

[Longshot520]

Closed the 5 1490/1510 verticals when we approached the high again after Fed minutes. Maybe a bit premature, but the selloff EOD made me glad I did. They served their purpose, and the position closed at a nice delta neutral after they were sold. Feeling OK hanging out right here for awhile.

Greeks post vertical close:

New analyze graph:

Unfortunately I may have to go farther past 21 DTE to hit my profit target, but we'll see how the market reacts with the Fed's about face on rate hikes today. Hope to have some ranging in this area for the next few weeks. If I'm within 20% of my 5k PT at 21DTE, OR the market is simply to volatile for any adjustments/hedges to correct my risk/greek trends, I may just bail.

 

[Longshot520]

UGLY Friday. Was too busy for an update here, but I ended up rolling the puts back down to 1500. Took a bit of a bath but still well below my stop-loss and looking better now. Hoping RUT hangs out in this area for a bit while we wait for a catalyst.

I definitely have been "in" this trade a bit too much with all the volatility. The call spread purchased earlier cost me a bit with all the whipsaw, and I now need to remain in the trade past the 21 DTE, but I'm still confident I'll end up with a profitable trade. Hopefully we won't have another day like Friday in the next 2-3 weeks! Upside still remains a challenge but barring a US-China trade deal, I don't foresee any hard upside catalysts. I should be able to profit between 2-3k if we finish up near the 1500 mark by next Friday, and ideally get out before gamma really begins to pick up near expiry.


Today's greeks after Friday's roll:

Analyze Graph

 

[Longshot520]

Hey all

Have not posted in awhile sorry. Been very busy with current job and new baby on the way. Wanted to check in. I closed this trade today at 2:45 for a $1400 gain after a lot of volatility and a nice down move today. I definitely cramped my profits with some bad luck with upside hedges consistently going against me every time I put them on, but even after all that, still made out with some decent money. Definitely not 50% APY material, but given it was the first live trade and the market environment as of late, I'll take it.

Made a booboo on the June trade. Going to update it tomorrow AM and repost.

 

[Longshot520]

OK, fixed the June entry.

June 10-20-10 fly with 50 point wings, body at 1540, roughly 30 points below current price.

Greeks:

Analyze Graph:

Wishing we had more volatility, not digging a fly trade in a low volatility environment, but the appeal of this trade remains it can withstand a melt up, and has plenty of downside room also.

Let's roll.