Destriero - Butterfly Trades

BeautifulStranger · May 5, 2021

.sigma said:
youre giving this advice to a guy who’s had 11 of the last 12 years in the green.

ironchef said:
Conclusion: It looks more and more like randomness + bull market rather than skills.

What next: Unwind all my trading positions and retire from trading. Like a lucky gambler, I should not push my luck any further and should quit while I am ahead.

I’ve done worse.

.sigma · May 9, 2021

ironchef said:
I don't know how you approach trading flies, if you traded weekly time to expiry, perhaps try longer expiration?

For me I I modeled butterflies using BSM, varied every parameters to see how they affected the outcome, then tested with historical data (for example SPY). It was a huge undertaking as I spent 3-4 years on it. I am in the process of testing one approach based on reading posts from @destriero. I don't have a statistically significant sample size to know for sure. But so far, my hat off to @destriero.

im interested in hearing more of this post? What’s this test that took 3-4 years about?

ironchef · May 13, 2021

longandshort said:
What makes a good trader good is their ability to stay focused on the trade. It makes sense to take a break when you feel distracted. However, based upon your record, I would say you probably have skill. Where you could improve is by figuring out a way to hedge out underlying beta. For example, butterfly’s pinning expected variance between your single name and a benchmark (or a pair). Another example would be managing your trade to keep it profitable (adjusting a wing, etc.).

Thank you for the kind words and coaching.

Not skill, more like having strong conviction and been stubborn. I made a bet that the recovery after 2009 should be massive and durable and stuck with it. Anyone could duplicate/better the return by simply going on margin or the equivalent by longed call options.

Why I chose to stop now? I shouldn't push my luck:

https://www.bloomberg.com/news/arti...d-the-math-explaining-active-manager-futility

You could substitute "active manager" with "trader".

ironchef · May 13, 2021

qlai said:
Is this goodbye?

Though I won't post as much going forward, no, not good bye, just an acknowledgement that I received lots of help and coaching from many of you on ET.

ironchef · May 13, 2021

BeautifulStranger said:
Compare the following payoff matrix of a bullish structured iron condor to owning the underlying. The right most % column represents the return on the underlying for a given price. The other numbers represent the estimated return on maximum risk for the iron condor based on price and date:

View attachment 258238
http://opcalc.com/ue9

Notice the leverage, the profit range, and the fact this is a defined risk trade. My guess is you could find a way the make options work for you if you really wanted to.

In any event, best wishes to you.

Very interesting way to look at the problem.

However, to make money, everything comes down to your opinion vs the market.

ironchef · May 13, 2021

.sigma said:
youre giving this advice to a guy who’s had 11 of the last 12 years in the green.

Be nice. I appreciate his comments.

ironchef · May 13, 2021

.sigma said:
im interested in hearing more of this post? What’s this test that took 3-4 years about?

1. I went to school to learn VBA Excel.

2. Then learned to program GSM, using it to calculate premium, greeks...

3. Programmed the reverse using premium to calculate IV....

4. Parametrized IV skew, term structure, fed into GSM....

5. Backtested butterflies using historical price data + assuming certain skew, term structure.....

6. Computed option premium using other distributions (both empirical and theoretical) instead of Gaussian.

I am sure I could find all of these from some web services like OATS, for example, but since my full time job was trading, I wanted to get a good understanding of the basics.

ironchef · May 21, 2021

Final report card on my butterfly experiment:

I closed out the last butterfly trade this morning: BMY 5-21-21 65/70/75 which I set up on 4-20-21 for $161.53. I received $250.75 for the 65 and will let the 70 & 75 expire worthless with a projected net profit of $89.22.

Overall, out of 33 trades I had 20 winners and a decent profit. Even though 30 is a small number it is statistically significant. I could probably make a living doing this if I scale it up.

Would I scale up? No, I am scaling back from active trading.

Thanks again @destriero for the inspiration and coaching.