Fly Structure

[.sigma]

I recall that Destriero usually sets his wings very wide, almost to the point where he is paying no extrinsic value.

Edit: The wings depicted on this simulator pay little extrinsic value.

Idk why people think Desty bought wings very wide? He does it all, in all variations. Sometimes his width is 10 bucks, other times it’s 100. The key is which wing do you skew to bias your risk (whether it be a vol bias or directional or both). This is where 132/231 and simple skip strikes come into play

the question becomes, what’s the benefit of paying little to no extrinsic value on wings?

 

[BeautifulStranger]

Idk why people think Desty bought wings very wide? He does it all, in all variations. Sometimes his width is 10 bucks, other times it’s 100. The key is which wing do you skew to bias your risk (whether it be a vol bias or directional or both). This is where 132/231 and simple skip strikes come into play

the question becomes, what’s the benefit of paying little to no extrinsic value on wings?

I assume there would be a capital efficiency aspect with buying “Garbage wings” for lower margin requirements. Additionally, Destriero has preached to others, including myself, on managing risk. It’s a bummer when a overnight event causes a 6 sd move against your naked exposure. In fact, sooner or later, it will happen.

Personally, I love the idea of buying low IV legs and selling higher IV legs with my vertical and horizontal spreads. The one thing that bothers me when buying OTM ES put butterflys is either I’m paying an awful lot of IV on the DOTM put or taking on greater risk. This is where the 2-3-1 structure may help? You only buy DOTM put at the highest IV while having additional premium from additional contracts working for you versus the 1-2-1. I presume the 1-3-2 comes into play when IV is lower for the DOTM wing, as in strikes above market price of ES currently. Maybe the optimal structure, especially for longer duration butterflys, is based on one’s volatility outlook. Try to imagine the effect of a 5% move in the underlying combined with a 10% move, or whatever, in IV upon the various structures, and see which works best.

Thanks for reminding me of this topic. Now on to the option pricing simulators!

 

[.sigma]

I assume there would be a capital efficiency aspect with buying “Garbage wings” for lower margin requirements. Additionally, Destriero has preached to others, including myself, on managing risk. It’s a bummer when a overnight event causes a 6 sd move against your naked exposure. In fact, sooner or later, it will happen.

While I agree with this, I don't think it applies here. I'm not concerned with 6 sigma events because I'm not running a large book of optionality.

For example, I could trade a single fly in each of the most liquid of underlyings (equity), and "spread" out my risk (assuming the UL arent highly correlated), this is one way.

The next example is instead of trading fly's in various UL, just trade a bunch of overlapping flies in a select group, or even one single underlying such as SPX or SPY.

Your comment on the pumped up IV in the OTM put is crucial. Depending on the vol surface/microstructure this is where the 231/132 come into play.

From what I've seen, we can short guts ATM, or slightly OTM/ITM, then the heuristical method of wing insurance will be chosen where the most volatlity/volume by price is located.

 

[TheZar]

Is this atm bull Put butterfly trading at a credit because the move down in SPX? Coming from the tastytrade side of things, to reading atticus, forgive me if i dont understand yet.

 

[.sigma]

What do you mean by "move down in SPX"?

WHen it comes to 132/231 fly's, you can structure the wings 2/1 ITM to body-strike.

In your example you bought the 3200/3270/3335 231P, the width of the upper wing to body is 65 points, while the lower wing is 70 points in width from the body.

instead, you could buy the 3235/3270/3340 231P for a 13.20 debit. Notice the the ratio of the wing width in relation to the body. (70 upper/35 lower). Keep playing around with the strikes and see what type of R:R ratio's you can come up with, and over time you'll start to get a feel for it.

This is just an example, not a rule.

 

[TheZar]

The move down in the last two weeks. So i was guessing higher IV in puts. But as you said, its just widths

When i go 2:1 ratio of width, i get a very low delta. Is this trade supposed to be neutral?

I guess in confused in what im trying to do exactly with the 232 132. As different widths offer quite different deltas.

My experience is in verticals, iron flys, and directional broken wing butterfly (covered ratio spread). Having a hard understanding the itm butterfly.

 

[Justrade]

I think he preferred to trade OTM flies not ITM

 

[.sigma]

OTM/ITM has nothing to do with it

 

[TheZar]

If you don't mind a little more detail. What does have to do with it? What are you looking for when building the structure.

 

[BeautifulStranger]

If you don't mind a little more detail. What does have to do with it? What are you looking for when building the structure.

Personally, I am after defined risk on swing trades using a directional ‘Fly that has no immediate theta costs because most of my losing trades are exited the next day, often a few minutes after the next day’s open.

It seems the major consideration for professional traders is relative pricing for a particular spread as shown by their custom built spreadsheets or high end platform. Metrics such as maximum ROC, POP plus payoffs, Theta to gamma ratios, and so on might be helpful depending what your objectives are with the trade.

I’ve been plotting the price history of some option spreads with IB and was surprised by the amount of pricing variability throughout the day. A full time option trader would be well advised to create their own pricing spreadsheet and actively monitor it or at least create automatic alerts.