Double Broken Wing Butterfly

J

jones247

I understand that many professional option traders prefer the Broken Wing Butterfly (BWB) over the standard butterfly. I'm planning on experimenting with a strategy that would be an earnings play setup...

In essense, if I were to establish a BWB call and a BWB put, both OTM, about 3 weeks before earnings, would that be a statistically valid play??
By "statistically valid", I mean high probability and a controllable risk:reward structure (depending on when I would exit my positions).

Of course, a major issue is the cost of establishing 8 legs (4 puts & 4 calls). Maybe it would be worth leasing a seat on CBOE (or CME for option futures)...


Any thoughts...

thanks,

Walt
 
What other way can I put on a spread that is a slight credit. If the trade goes further otm or doesn't move, then I get a few bucks for my troubles. However, if it goes toward ITM, then I get the jackpot (as long as I don't allow it to go too far ITM - too far ITM & I lose big)...

Therefore, my only "outlier" risk is if the stock gaps "Big Time" (i.e. Merger/Acquisition or Big earnings surprise)... Even still my ultimate loss is still limited. This would still be less harmful than a naked short option position, or holding shares without any hedging.

Walt
 
Walt,
I have thought about using a double BWB and think there are situations where it would work just fine. You either end up heading towards the sweet spot or you are in the wrong spot. On the other hand, if nothing happens, you earn a little for your trouble. So, if the market moves past your debit option in either direction, but not too far, you'll do well. This means in the final analysis you have 3 good situations out of five possibilities. However the 2 bad scenarios will put you in a tough losing position with no easy way out.
The problem with earnings plays that I dislike is the lack of adjustment potential. When they go wrong, they're history, and you are stuck with what you get.

May I suggest you give them a try with an index options situation, and get a good feel for how they work out in a fairly manageable position. Only use a modest part of your margin (5-10%), generate a little credit, and you should be able to figure out how to handle them fine without blowing out your account. You might even make good money if you predict the market correctly.

If you have a good broker who charges reasonable commission rates, you can still have 8 legs and make money ( I have and am). Of course, your broker will also be very happy to take your commission money ( as does mine).
 
I'd say the RUT, SPX and NDX are all good choices for this try. Let us know exactly what you're trying and how it goes.

Here is a suggested play on RUT that looks a bit interesting without being a major killer--

Puts--
+1 550
-2 540
+1 520

Calls
+1 660
-2 670
+1 690

Net credit (midpoint play) 0.80 for each side

Margin: roughly 1000 (if your broker is stupid double that)

and about a 50/50 or better chance of making a profit.
 
My positions are tighter than John Green's recommendation; although I believe his structure is safer.

Put:
+1 580
-2 570
+1 550

Call:
+1 650
-2 660
+1 680

My probability calc for at least a small profit was about 80%
 
Thanks for posting the example. I think that you and JohnGreen covered the possibilities of position movement. As long as you receive a net credit you have a high probability of achieving a small gain.

I wouldn't be highly fearful of the "outlier" risk of the stock gapping "Big Time" (i.e. Merger/Acquisition or Big earnings surprise). Mergers don't happen very often and gaps that occur outside of regular hours that get you into the body of the BWB can be managed by trading the underlying. If you live in fear of SHIFT happening on your keyboard, the only alternative is a money market account :)
 
I'm currently using this delta neutral strategy, but at small debit, close to 0.
I don't use it on stocks because of possible gaps.
Only NDX and RUT for me.
Using it at debit allows me to get out of the position with small loss in case on violent move of the market (say August 2011).
I'm using this strategy since September 2011, got a small profit of 2% a month on average after slippage and commission. That's not huge, but I know my risk is very controlled, I don't risk the "1 trade wipe out all profit of the year scenario" of short Iron condor players.
 
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