Has anyone used the "Bearish Butterfly" strategy with any degree of success?

[justrading]

Firstly, I think the idea of adjustments relates to how you see the trade. Do you plan to hold to expiration, or have defined criteria for exit that have nothing to do with expiration? Holding a trade that's working well to expiration is fine, holding a bad one simply because you can, in the hope it will turn around, is probably not such a good idea.

From what I have seen in the journals linked above, atticus does not think in terms of holding to expiration.

Secondly as noted above, adjustments are basically trying to make the best of a bad job. Case in point, after Bernanke opened his big trap last week, most of my positions 'went South'. Frustrating, curse and swear, whatever, the bottom line is the premise upon which the trades were made no longer existed. I could throw good money after bad and adjust, or acknowledge that those trades were done, close out, and look for new trades given the current situation.

Well, the only regret I have is not closing them sooner. This time I didn't because I structured risk so that 100% loss was within risk limits. Chalk one up to experience, but the next time I see any position that needs a mini-crash to come good, I'll pull the plug without a second thought. Whatever gets 'saved' can pay for the beer.

 

[darkshogun]

Quote from justrading:

Firstly, I think the idea of adjustments relates to how you see the trade. Do you plan to hold to expiration, or have defined criteria for exit that have nothing to do with expiration? Holding a trade that's working well to expiration is fine, holding a bad one simply because you can, in the hope it will turn around, is probably not such a good idea.

From what I have seen in the journals linked above, atticus does not think in terms of holding to expiration.

Secondly as noted above, adjustments are basically trying to make the best of a bad job. Case in point, after Bernanke opened his big trap last week, most of my positions 'went South'. Frustrating, curse and swear, whatever, the bottom line is the premise upon which the trades were made no longer existed. I could throw good money after bad and adjust, or acknowledge that those trades were done, close out, and look for new trades given the current situation.

Well, the only regret I have is not closing them sooner. This time I didn't because I structured risk so that 100% loss was within risk limits. Chalk one up to experience, but the next time I see any position that needs a mini-crash to come good, I'll pull the plug without a second thought. Whatever gets 'saved' can pay for the beer.

Rather than looking at it as a bad trade, what about looking at it as a trade put on with relative neutrality in mind toward the market direction, since direction can rarely be predicted (and seems foolish to even try). One which you 'adjust' when necessary, removing or adding positions to create a moving butterfly of sorts that hovers above/near the market price and one in which you close out before expiration when you hit a certain profit target or a predetermined maximum loss decided beforehand. Butterflies are designed to 'fly' after all, aren't they? They're not hummingbirds. Seems better than placing static, narrow, low probability trades that must be hit nearly spot on to profit. Then again I'm a beginner. I have much to learn.

 

[comintel]

Quote from darkshogun:

..... One which you 'adjust' when necessary, removing or adding positions to create a moving butterfly of sorts that hovers above/near the market price and one in which you close out before expiration when you hit a certain profit target or a predetermined maximum loss decided beforehand.....

I am not aware of any evidence that such an approach would work. I realize that that is the typical approach of many options educators, but I have not heard it justified satisfactorily.

On theoretical grounds, the expectation of such an approach should be exactly zero.

If each individual strike is correctly priced at all times, then by definition any combination of strikes is also correctly priced at all times. There is no advantage in terms of expected profit of getting in or out at any particular time.

If some particular strikes are mis-priced occasionally and you can detect those times, then you should just trade those strikes at those times. There is no advantage in setting up a complicated floating position ahead of time unless strikes in it are already mis-priced at the time you put on the position.

A butterfly makes money if you can predict a range in which the underlying will be trading closer to expiration. If you cannot make such a prediction, there is no advantage to having on a butterfly.

 

[darkshogun]

Quote from comintel:



A butterfly makes money if you can predict a range in which the underlying will be trading closer to expiration. If you cannot make such a prediction, there is no advantage to having on a butterfly.

I personally believe that trying to predict the direction of any market is the purview of insiders, amateurs or idiots. I've had my share of experience being both an amateur and an idiot with forex spot trying to predict direction. I now think that only market neutral strategies are worth considering and that any strategy with a strong directional bias will be a sure loser over time.

 

[comintel]

Quote from darkshogun:

I personally believe that trying to predict the direction of any market is the purview of insiders, amateurs or idiots. I've had my share of experience being both an amateur and an idiot with forex spot trying to predict direction. I now think that only market neutral strategies are worth considering and that any strategy with a strong directional bias will be a sure loser over time.

So why are interested in bearish butterflies then? A bearish butterfly *is* a directional trade.

"Insiders, amateurs or idiots" is way too strong language when there are people here successfully trading directional strategies.

 

[darkshogun]

Quote from comintel:

So why are interested in bearish butterflies then? A bearish butterfly *is* a directional trade.

"Insiders, amateurs or idiots" is way too strong language when there are people here successfully trading directional strategies.

I don't mean to disrespect anyone. More power to you if you can predict market direction with a high degree of accuracy. Price movement is so unpredictable that it would seem to take luck and a bit of wizardry to successfully trade directional strategies without some form of astute hedging. True, a bearish butterfly would lean to the bearish side, but it can also perform well on the bullish side up to a certain point. Apologies for offending anyone. Note I took credit for being an idiot myself.

 

[sonoma]

Quote from darkshogun:

I don't mean to disrespect anyone. More power to you if you can predict market direction with a high degree of accuracy. Price movement is so unpredictable that it would seem to take luck and a bit of wizardry to successfully trade directional strategies without some form of astute hedging....

Just remember that you're joining the crowd trading directionally if you adjust your fly as time goes by as the underlying moves around. For example, if you're gaining short delta as the market moves up and you feel compelled to adjust, then you'll likely add a collection of trades that are long delta to hedge a bit of that short delta. Adding that long delta is your attempt to predict market direction.

 

[RedEyeFly]

Ive known Locke since he started trading with Dan Sheridan's crowd in 06/07. Honestly, i wouldnt do anything he promotes, and recall that he was more interested in making money as a trading 'mentor' than a scholar or experienced trader who actually knows what he's doing. For what it's worth, i would not pay up to stoke another's ego.

 

[Maverick74]

Every option position is directional. Either by price or by vol. Sorry kids, to play this game, you gotta predict something. It's like sitting down at a card table and saying you don't like to gamble. LOL.

 

[Georgi90]

Quote from Maverick74:

Every option position is directional. Either by price or by vol. Sorry kids, to play this game, you gotta predict something. It's like sitting down at a card table and saying you don't like to gamble. LOL.

Don't get it twisted, they talk about delta directionality.