Gamma Scalping with Reverse Iron Butterfly

[jones247]

Quote from atticus:

I quoted you accidentally.

I assume that you meant to quote Dagnyt (Mark)...

 

[jones247]

Quote from atticus:

There is nothing magical about gamma-trading into a fly. The position ceases to generate deltas at the wings, so it's not as though the diminished theta (over a straddle) somehow increases the expectancy.

I know a guy at the Nymex who made millions over the years in long vol and scalping gammas. In 2008 he went in huge (Ks of contracts) on a long atm CL straddle when vols were in the top decile. He was confident the vol would continue to break out. Not only did he miss many scalps by pennies, but the contract pinned to his straddle-strike at expiration, taking him out of the game.

If I understand correctly, the Nymex guy made millions gamma scalping the flys (particularly a Reverse Iron Butterfly). Nonetheless, in 2008 he got taken out of the game [does this mean that he lost millions]... why did the flys not protect him from a IV collapse??

Thanks,

Walt

 

[jones247]

I guess being pinned at expiration is more dangerous than I thought... [note to self] - liquidate short positions before expiration...

 

[spindr0]

Quote from jones247:

If I understand correctly, the Nymex guy made millions gamma scalping the flys (particularly a Reverse Iron Butterfly). Nonetheless, in 2008 he got taken out of the game [does this mean that he lost millions]... why did the flys not protect him from a IV collapse??

I think Spartacus's example was about a long straddle.

If you're long the body of a fly, condor, etc., IV collapse hurts and vice versa.

 

[jones247]

Didn't he mention gamma trading into a fly... and the position ceases to generate delta at the wings? I assumed that the example he gave pertained to gamma scalping with a butterfly...

 

[erol]

Quote from IanMacQuaide:

I saw Iron Butterfly live in 1970 in San Antonio. Great concert!

i read this on the bus... and I lol'd



if there was an option strategy called the iron maiden, i'd be all over it.

 

[acen1975]

Quote from atticus:

Fair enough, but how do you arrive at the belief that a straddle's theta is double?

negative empiricism again-i was told like that.....and i never question it.....
and with a simple logic it gets you right there-you substitute 2 long options with a future-you get rid of theta exposure...but lose the gamma for that.
but when they are hooked into a straddle its really the same,i was thinking and counting for two hours yesterday to "disprove" you,and i couldnt
so BIG THANKS to you for the hint to compare them as a same amount of investment.....
now,thinking even more over it,i was stupid enough to use futures for one of the legs all this time,when actually the cost of trade of a straddle is smaller,compared to the investment....no need for the futures trades at all........

 

[acen1975]

Quote from atticus:

There is nothing magical about gamma-trading into a fly. The position ceases to generate deltas at the wings, so it's not as though the diminished theta (over a straddle) somehow increases the expectancy.

I know a guy at the Nymex who made millions over the years in long vol and scalping gammas. In 2008 he went in huge (Ks of contracts) on a long atm CL straddle when vols were in the top decile. He was confident the vol would continue to break out. Not only did he miss many scalps by pennies, but the contract pinned to his straddle-strike at expiration, taking him out of the game.

another question:
if you use r.iron fly for scalp,then you must scalp OTM shorts.....the gamma is very small,bid/ask is much bigger and hardly the scalp will battle even with commissions and bid/ask.....you need much bigger moves to do something,which with a straddle will make you much more profit....
i would agree,if your guy uses this to balance his sheets ,if he is MM,but to use it for gamma scalp,as a prime strategy?
help out here,if you have time

 

[weewilly]

scalping butterfly gamma is like chasing a turtle with a lamborghini.

prior to expiration week, paint drying is more interesting to watch.

 

[gg12]

If you sell time the underlying shout stay quiet.
But you can't guarantee any low volatility time period to happen ad finitum. Big moves can come anytime. What to do then?
You have to partially sell the loosing leg and accept the loss when faced with a move agains you.
The winning leg has to be inforced and you can even add to your position.
Selling with a loss is hard from a psychological point of view. But that secures your edge.

Spend a lot of time on psychology.

Good luck!