Destriero - Butterfly Trades

[.sigma]

The interesting part is that they started from nothing - no "previous art" - and worked out a complex, sophisticated system, the entirety of a stock market and all its associated mechanisms, in a few decades. Economic pressure is an amazing driver of creation and innovation, it seems.

This might not be true, I'm starting to think history might be twisted, even (dare I say?) lies. Maybe these people got the idea from older societies. Who knows.

One thing is certain, though. Our generation is going through a massive conflux of a cycle right now.

While yes options have been trading since the 1600's and probably even before, right around 1970 everything started to accelerate. For unknown reasons, the last 100 years has seen unprecedented growth, and we all take it for granted.

But right around the 70's computers started popping up, being commoditized. People started to use these computers for everyday use. It was our old buddy Fischer Black who thought about the idea if trading could be automated (Market making, not automated trading systems).

Around the same time our other buddy Claude Shannon was creating wearable computers and using it to bet at casinos then subsequently the markets with the infamous Ed Thorp.

1970's the NYSE introduced the "designated order turnaround" (DOT) which electronically routed orders to the floor. This was revolutionary. Then the war of the fiber optic cables. Who could get information 0.00000000001 seconds faster wins. Then program (algo) trading, the automation of index arb, the abolition of human market makers and the rise of the machines.

All of this in a span of a few decades. This growth is taken granted for, and we are living through it right now.

 

[sef88]

For what is worth, if anyone is keen on placing options spreads via IB gateway API , I wrote a short 101 tutorial here.


Enjoy!

 

[.sigma]

For what is worth, if anyone is keen on placing options spreads via IB gateway API , I wrote a short 101 tutorial here.

Not to be a sour grape, but this is ELITEtrader, not NOVICEtrader, you are amongst guys who can arb index vol blind folded, using BRAILLE option chains, forecasting future vol just by the FEEL of the bumps.

Like Biden says, C'mon man! Lols

 

[sef88]

Not to be a sour grape, but this is ELITEtrader, not NOVICEtrader, you are amongst guys who can arb index vol blind folded, using BRAILLE option chains, forecasting future vol just by the FEEL of the bumps.

Like Biden says, C'mon man! Lols

Not really, I use volatility term structures and Garch based models. The article is just some self-contained python codes to place spread positions.

 

[.sigma]

Not really, I use volatility term structures and Garch based models. The article is just some self-contained python codes to place spread positions.

Was just joking...

but dang, garch models eh? What a badass. Do you prefer TGARCH for one day look-aheads?

Welcome to ET!

 

[tsznecki]

Well today was insane. Realized profits in a few cheap stocks, but the big winner: 24 DEC 20 600/640/680 puts in $TSLA, bought it last week at 5.10, today closed around 22.22. Tesla closed 640.43. This is the power of a pinned fly, especially in an underlying like TSLA.

I also did something I never did before. While I was watching TSLA intraday, I saw a short squeeze forming, so I was thinking of buying the 630/660 call spread. Instead I decided to buy the 630/660/690 call fly @ 7.57. I was a bit early, but this fly is already almost at 11 bucks. Its amazing how fast these flys move as expiration approaches in stocks like TSLA

Had the Dec31 660/620/580 put fly at 10.xx on Dec 21 when TSLA was low 660s, saw it go to ~16.xx on Dec 22. Scratched it today in the AM for 10.xx when TSLA was high 660s.

Loving the structure, not as much juice as simply being long OTM into a large move, but you wouldn't use flies for breakouts. I find reversals work best for these as it seems localized vol collapses.

Only thing I can add is the P&L graph is misleading on flies, you look at it and think this isn't a money maker even if you collapse vol. I have found otherwise, but maybe it just works for my underlying and my style.

 

[.sigma]

Had the Dec31 660/620/580 put fly at 10.xx on Dec 21 when TSLA was low 660s, saw it go to ~16.xx on Dec 22. Scratched it today in the AM for 10.xx when TSLA was high 660s.

Loving the structure, not as much juice as simply being long OTM into a large move, but you wouldn't use flies for breakouts. I find reversals work best for these as it seems localized vol collapses.

Only thing I can add is the P&L graph is misleading on flies, you look at it and think this isn't a money maker even if you collapse vol. I have found otherwise, but maybe it just works for my underlying and my style.

Why wouldn't you use flies for breakouts? Do you mean breakouts to the downside? Because of the increase in volty? The thing is, stocks like TSLA have upside skew as well, so even a breakout to the upside can raise implieds (as you probably are aware).

Your post brings up a few important concepts.

You bought the fly originally for $10, saw it go to $16.. which is a 60% return on debit. Not bad, and not sure why you didn't put in a sell order. We all know $TSLA moves like a steppenwolf and its best to liquidate any type of decent profit if its in reach. Fly spreads are very volatile on stocks like Tesla.

Its funny you mention how the P/L graph is misleading on flies. I agree, but risk profiles of ALL option strategies are misleading. Terminal distributions should be used as a proxy for determining at what point you'll manage the spread for a profit or loss.

I advise all traders to take these risk profiles with a grain of salt. When you press order entry and review your trade.. remember that your Max Profit/Max Loss is an illusion. I call them PHANTOM RATIO's, as these numbers are just terminal P/L's that a trader will never witness. Thus its essential to take a percentage of the R:R and manage your fly early. I try to shoot for 25% and I'm out. I leave a fvck ton of money on the table but I can't worry about that.

 

[BlueWaterSailor]

This might not be true, I'm starting to think history might be twisted, even (dare I say?) lies. Maybe these people got the idea from older societies. Who knows.

I'm not sure how that would work... de la Vega was a contemporary reporting what he saw (albeit in somewhat flowery language), and we have no written record of "prior art" (except the Thales of Miletus / olive presses story). Much of what I know about history - availability of venture capital, ship-building/commercial voyaging, stability of political structures/development of the artisan classes, etc. - strongly implies that such a market was essentially impossible before that point. I'd also note the development of parallel contractual structures - e.g., "gentlemen's contracts" for ventures in Venice - around the same period, but not before. The closest thing we have prior to that was merchants risking their goods on coastal trips in the Med and trading by caravan - essentially binary risk, a.k.a. gambling (which has been around forever.)

But as is often the case with history, there's no "proof" - only preponderance of evidence.

One thing is certain, though. Our generation is going through a massive conflux of a cycle right now.

While yes options have been trading since the 1600's and probably even before, right around 1970 everything started to accelerate. For unknown reasons, the last 100 years has seen unprecedented growth, and we all take it for granted.

But right around the 70's computers started popping up, being commoditized. People started to use these computers for everyday use. It was our old buddy Fischer Black who thought about the idea if trading could be automated (Market making, not automated trading systems).

Around the same time our other buddy Claude Shannon was creating wearable computers and using it to bet at casinos then subsequently the markets with the infamous Ed Thorp.

1970's the NYSE introduced the "designated order turnaround" (DOT) which electronically routed orders to the floor. This was revolutionary. Then the war of the fiber optic cables. Who could get information 0.00000000001 seconds faster wins. Then program (algo) trading, the automation of index arb, the abolition of human market makers and the rise of the machines.

All of this in a span of a few decades. This growth is taken granted for, and we are living through it right now.

Yep. In much the same way that most of the market follows the SPX, all of this has followed the asymptotic curve in the development of science and technology in the past century. I find it fascinating to consider the perspective change, the Future Shock that someone born a hundred years ago and alive today must have gone through in their life; no one in all of human history has ever experienced that massive of a swing before. Just thinking of the changes I've seen in my own life - from learning to use a quill as a first-grader in Moscow to doing data analysis on a petabyte-plus data set, from having to dig for potatoes for the dinner table to casually buying foods that were grown on the other side of the world for pennies - always brings a smile to my face. I wonder what comes next?

 

[Overnight]

...I wonder what comes next?

When this comes out...

...Your life cycle will be complete.

 

[Bomp]

Let me add a few more comments:

1. I am not a fan of @destriero, that was why he blocked me. But I have to give the devil his due. He is the real deal.

2. Knowing his trades were real and they were profitable gave me confidence to finding my own.

3. Butterfly, like selling options, in itself is not an edge. The expected profit of any butterfly is zero. I ran fly analysis using BSM and found the expected profit for any setup to be around zero.

4. But like card counting in blackjack, there are some situations where the expected profits are positive.

5. I finally understand the relationships between fly body, location, expiration, volatility, underlying behavior and exit. I will know if it works after I accumulate a statistically significant sample size (~50-100) in real trades but so far I am happy.

Happy holiday and stay safe.

Technically when you trade flies your trading probability. As the wings converge at to the body, the price of fly should reflect the risk neutral probability of the spot price ending exactly there at expiration. As you widen the wings the price should reflect the probability(risk neutral) of around the average or half of the area of the triangle.( please forgive any errors here as my stats and math are very rusty). So no surprise that your backtest yielded zero expected payoff. In basic terms , there are trades to be placed in flies if your view of the real probability is different that the one implied in the market.