Destriero - Butterfly Trades

[deltaf0rce]

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.

Fucking amazing post. Appreciate it.

 

[deltaf0rce]

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.

This is the type of short, sweet insight I appreciate. Thank you.

 

[ironchef]

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.

This is way beyond my pay grade. I am still on the ground floor doing simple 121. For me, to first order, profit comes from guessing correctly where the belly of the fly will be. Everything else are second order.

So far, the results are encouraging, of the 12, I had 2 losers. The 5 new flies are all showing a profit so far.

I want to thank all of you who contributed your ideas to this thread. Lots of wonderful ideas. I have a lot of works to do.

 

[deltaf0rce]

I want to get excited about the fly I just cannot understand why everyone has such a boner about them. They seem very appealing on a risk reward but outside of that not sure.

 

[ironchef]

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.

Your fly was not symmetrical, left wing showed a profit at expiration? Was it a broken wing?

 

[BeautifulStranger]

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..

Most of my flies have been very directional and I’m quick to mange non-performers, especially if theta turns negative. Basically my flies are a cheap or even “Subsidized” theta version of a call or put where I hope price reaches the body a day or two before expiration.

I am looking at making my trades a little less directional and am considering structuring iron condors such that the breakeven price of the IC at expiration is roughly equal to the current price of the underlying when placing the order. The purpose for this would be more for easy statistical analysis comparing trade types than anything else. In essence, I want to measure the relative performance between trading the underlying and trading the IC according to my trading style.

Thank you for relaying your experience to us. In time, I may very well become almost “Direction neutral”.

 

[BeautifulStranger]

Your fly was not symmetrical, left wing showed a profit at expiration? Was it a broken wing?

The structure was 2-3-1, with the wings equidistant from the body, thus allowing a payoff no matter how far ES might fall.

 

[BeautifulStranger]

Fucking amazing post. Appreciate it.

Thank you for the kind words. While Destriero’s posts can be hard to decipher, there’s “Gold in them there hills”, making the effort thinking about his posts worthwhile.

 

[ironchef]

Most of my flies have been very directional

Good to know I am not alone.

In time, I may very well become almost “Direction neutral”.

I hope I can do the same.

 

[taowave]

Why the distinction between directional vs neutral???

Neutral is a direction ...

Or why not go with neutral if that is where the edge is and simply adjust your Delta with "Shtock", cheap verts or whatever floats your boat??