Destriero - Butterfly Trades

[destriero]

I’m not at your level but when realizing that vol was an extra profit opportunity to be made on an overnight position, it almost feels like you’re leaving money on the table by not embracing vol.

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

 

[Bomp]

Conceptually, trading Flies is pretty straight forward. You can bet on the vol curve flattening or steepening, changes in its shape(more or less convex), or straight down rolldown. Whether you use 121 or 321 or variants on these just depends on which is optimal for the bet you want to put in place. Last one of course(rolldown) will depend on how sticky the vols are to the strikes. The challenge, from a retail side is to find consistent and accurate option chain info to build proper surface curves. Pure "Arbing" will be very difficult as there are people with latency and processing advantages that make it very difficult for retail guys to enter into such trades.

 

[cesfx]

In some payoff simulation of slightly unbalanced otm 132/231 Vs 121, visually the 132 looks to me like it might enter the profit belly faster than 121. Will try soon. I am enjoying learning verticals here, the knowledge shared is priceless.

 

[caroy]

In some payoff simulation of slightly unbalanced otm 132/231 Vs 121, visually the 132 looks to me like it might enter the profit belly faster than 121. Will try soon. I am enjoying learning verticals here, the knowledge shared is priceless.

I'm becoming more of a fan of the 1:3:2 put on for a credit on the put side around earnings. After earnings if there are three equally likely scenarios - stock rallies, stock falls, all info already built and no movement but neutral drift. The vol collapses after earnings and this structure might be the most likely to benefit. If it pops to the upside you keep your credit. Tryin to put this into practice this week with a fly or two.

 

[taowave]

1x3x2 doesn't necessarily imply broken or skip wing..

What often happens is you may choose to "widen" the strikes between your long leg and short midde vs a pure 1x2x1,and to keep the debit down,buy a further OTM wing.Syntheically you become short that embedded vertical.

1:3:2 i believe is the same as a broken wing or skip wing.

 

[caroy]

1x3x2 doesn't necessarily imply broken or skip wing..

What often happens is you may choose to "widen" the strikes between your long leg and short midde vs a pure 1x2x1,and to keep the debit down,buy a further OTM wing.Syntheically you become short that embedded vertical.

Interesting. I need to ponder this. My thoughts were often the 1:3:2 can net you a credit similar to a broken wing fly 1:2:1 with the same R/R.

 

[taowave]

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..

Interesting. I need to ponder this. My thoughts were often the 1:3:2 can net you a credit similar to a broken wing fly 1:2:1 with the same R/R.

 

[BeautifulStranger]

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

 

[deltaf0rce]

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

 

[BeautifulStranger]

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

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.

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