Destriero - Butterfly Trades

[newwurldmn]

I’m intrigued by the apparent opportunities that vol offers to profitable swing / position traders.

Say you wanted to leverage the smile, and apply the sticky delta concept and structure a trade to capture an opportunity. Can someone walk me through how that would actually be done, start to finish? Thanks

Skew is a complicated trade. It takes a big notional position to make moderate dollars.

My experience is that if I profit from sticky delta, I would have made money trading delta in 1/10th the notional.

 

[caroy]

I’ll give you my opinion. Hopefully a real trader will give his or her take.

Basically, I look to buy relatively cheap volatility(vola) and sell relatively expensive vola if I have an opinion on the underlying and volatility. Usually the smile, if there is one, is further out than my expectations. A more common trade for me when I’m bearish on the indexes is to buy a 2-3-1 symmetrical OTM put fly to take advantage of skew. I make the this fly symmetrical for a positive vega as volatility usually rises when equity indexes decline. In addition, I structure this ‘fly according to delta for positive gamma. I also consider the possibility of range expansion for determining where to place the body. Usually I will buy 2 45-delta puts, sell 3 22-delta puts, and buy 1 11-delta put. Of course, depending on my expectations and available strikes, I may deviate somewhat from the aforementioned deltas. My target is usually the body, although with this structure the maximum payoff is often a little beyond the body before expiration. My initial money management strategy applies if the underlying instrument takes out the previous day’s high and stays above the next day’s open for a defined amount of time or exceeds the next day’s open by a threshold amount. Below is a payoff diagram along with the greeks of the position. Note this structure has positive gamma, positive theta, and positive vega. The bid-ask prices you see are in volatility(Annual). Which reminds me, I need to change this to daily volatility.

View attachment 249355

Edit: My days to expiration are usually between 4 and 9 businesses when putting on this spread.

Thanks for sharing this and the rationale behind the set up.

 

[ffs1001]

Below is a payoff diagram along with the greeks of the position. Note this structure has positive gamma, positive theta, and positive vega. The bid-ask prices you see are in volatility(Annual). Which reminds me, I need to change this to daily volatility.

@BeautifulStranger, excellent post. Very informative.

I'm curious why you like to see the bid/ask in terms of vol as opposed to actual prices?
Another format maybe to show the vol as well as the option prices, which is what I normally use :

 

[BeautifulStranger]

@BeautifulStranger, excellent post. Very informative.

I'm curious why you like to see the bid/ask in terms of vol as opposed to actual prices?
Another format maybe to show the vol as well as the option prices, which is what I normally use :

View attachment 249357

I like to see what the relative difference in vola for each strike for selection purposes. I might think something like, “Damn, I can get 50 basis points more vola for moving my the body one more strike ATM and it is only costing “X” vola more on the single DOTM leg, deal!”. I’ll see the actual prices when I select a particular option. From there, if I like my greeks, I’ll add the spread to my watchlist and maybe place an order.

 

[taowave]

My experience is the next time I make money from riding with sticky Delta will be my first

Skew is a complicated trade. It takes a big notional position to make moderate dollars.

My experience is that if I profit from sticky delta, I would have made money trading delta in 1/10th the notional.

 

[caroy]

My experience is the next time I make money from riding with sticky Delta will be my first

I have one dog named Butters. I'm eying a new one and will name it Sticky Delta.

 

[taowave]

Love the concept,used to live by it,but I have found "gut trading" short term verticals to be a better approach..

As painful as it is,I buy in all my pennies,and I buy in short verticals for pennies...

9 days and in,if I am trading any type of fly structure,I don't even look at vol..

I like to see what the relative difference in vola for each strike for selection purposes. I might think something like, “Damn, I can get 50 basis points more vola for moving my the body one more strike ATM and it is only costing “X” vola more on the single DOTM leg, deal!”. I’ll see the actual prices when I select a particular option. From there, if I like my greeks, I’ll add the spread to my watchlist and maybe place an order.

 

[TrailerParkTed]

D1 -> Delta-one -> futures, shares.

Did Covid change your plans for attending the Inauguration? If your still going please be safe, I know you could smack down any sock puppet but there are some bitter ass looney tunes so again, please be safe Sensei!

 

[ironchef]

Play around with different "widths",differing long wings and compare cost,risk/reward..

Assume sticky Delta and eyeball what happens on varying moves up and down..

Thank you for the coaching.

 

[ironchef]

Attached are three articles related to sticky delta. Some of the links below are to websites that contain additional, advanced option related subjects.

http://deltaquants.com/volatility-sticky-strike-vs-sticky-delta

https://www.globalcapital.com/article/k6b934dyqnjd/the-sticky-delta-model

http://www.math.columbia.edu/~smirnov/Derman.pdf

Thanks. Will have to study these carefully.

There goes my weekends for the next 3 months.