iron condor

Maverick74 · Feb 1, 2012

Quote from daveyc:

iwm is about 1/10th the size of rut. if you get mid price or better, its the same, just larger. check for the skews. compare the difference on the different underlyings and determine if you are getting a good fill.

IWM is better then RUT. Cash settlements are a bitch. I'll be happy to pay a few extra cents for that privilege.

Dolemite · Feb 1, 2012

Quote from daveyc:

yes there is a very big difference ha. if you know what a butterfly looks like, it takes a debit as noted above. just turn a butterfly upside down to know what an iron butterfly looks like, it takes a credit.

Actually a butterfly and iron butterfly are synthetically the same. The difference is that instead of using all calls for example in the iron butterfly you would use a bull put vertical and bear call vertical. The call butterfly is for a debit with max profit at the short strike (strike width-debit) while the iron butterfly is for a credit with the max profit at the short strike (both shorts expiring worthless thus keeping credit which ain't gonna happen).

Ex RUT call butterfly Long 1 790 call short 2 800 calls Long 1 810 call

Iron butterfly Long 1 790 put Short 1 800 put Short 1 800 call Long 1 810 call

daveyc · Feb 1, 2012

Quote from Maverick74:

IWM is better then RUT. Cash settlements are a bitch. I'll be happy to pay a few extra cents for that privilege.

well, its just a suggestion and trade whatever it is you like, obviously. if you went to sleep during your trade and you allowed your trade to end up in the money, would you rather have it cash settled or be long or short an etf?

Maverick74 · Feb 1, 2012

Quote from daveyc:

well, its just a suggestion and trade whatever it is you like, obviously. if you went to sleep during your trade and you allowed your trade to end up in the money, would you rather have it cash settled or be long or short an etf?

Oh Jesus, I would much rather be long or short the ETF. LOL. You DO NOT want to be in the cash options if you are anywhere near your strikes.

daveyc · Feb 1, 2012

Quote from Dolemite:

Actually a butterfly and iron butterfly are synthetically the same. The difference is that instead of using all calls for example in the iron butterfly you would use a bull put vertical and bear call vertical. The call butterfly is for a debit with max profit at the short strike (strike width-debit) while the iron butterfly is for a credit with the max profit at the short strike (both shorts expiring worthless thus keeping credit which ain't gonna happen).

Ex RUT call butterfly Long 1 790 call short 2 800 calls Long 1 810 call

Iron butterfly Long 1 790 put Short 1 800 put Short 1 800 call Long 1 810 call

i stand corrected. i just took a long butterfly and turned it upside down.

daveyc · Feb 1, 2012

Quote from Maverick74:

Oh Jesus, I would much rather be long or short the ETF. LOL. You DO NOT want to be in the cash options if you are anywhere near your strikes.

why? how are you seeing the difference?

spindr0 · Feb 1, 2012

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Quote from spindr0:

Sell one each of these and buy two each of those.
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Quote from osho67:

Sorry -what would that do to my premium income ?

The more two each of those costs the less one each of these you get to keep.

spindr0 · Feb 1, 2012

Quote from osho67:

I have tried to find some information in the option books. It seems there is a difference between a butterfly and iron butterfly. With IB if I select butterfly combination it will be either all calls or all puts, How can I have a set up with calls and puts combined and execute the order as one click?

Why would you want to set up a butterfly with a combination of puts and calls? That involves 4 legs instead of three and that means more slippage and commissions.

If you insist, you can create this via a custom order in IB by selecting COMBINATIONS then OPTION COMBOS (SMART). When that opens the COMBO menu, click the icon at the far right (PAIR or LEG-BY-LEG).

It will be really helpful if someone gave an example of short iron butterfly. Some one described it as sell a strangle and buy a sreaddle or other way round. It will involve six positions . Please clarify. I want to really try one iron butterfly today with IWM.

If you brush up on your synthetics, it will make more sense. Regarding the description, you can factor the components. Daveyc's example was:

+1 81p
+2 79p
-1 77p

That could also be placed as two spread orders:

+1 81p
+1 79p

+1 79p
-1 77p

In the case of an iron condor, the sell strikes are different:

+1 75p
-1 77p
-1 79c
+1 81c

This order could be broken into the following:

-1 77p/79 strangle
+1 75p/81c strangle

It could also be placed as two vertical spreads:

+1 75p
-1 77p

and

-1 79c
+1 81c

It's more work but sometimes you can get a better fill by working an option component that has a wider B/A or grabbing one combo where the combo price is better than the natural.

Butterflys have higher profit potential but less safety and the reverse holds true for the IC's.

Clear as mud?

Maverick74 · Feb 1, 2012

Quote from daveyc:

why? how are you seeing the difference?

Completely DIFFERENT settlements! As you near the strikes at exp, the cash starts trading at a premium to parity because of the jump risk. It's equivalent to holding an option over an earnings announcement. The RUT settlement is very jumpy. You have 2000 stocks, most of which are listed. The RUT can spike 10 to 15 handles on average over spot. In 2008 RUT spiked over 80 handles on two occasions. Yes, 80 handles!!!!!!!

So if you are short cash going into exp you have two choices, either buy back your options at a HEFTY premium or gamble on the SET which could be a huge spike against you. And there is no way to hedge settlement. In fact, hedging only adds additional risk because there is very little correlation to SET and the underlying.

daveyc · Feb 1, 2012

Quote from Maverick74:

Completely DIFFERENT settlements! As you near the strikes at exp, the cash starts trading at a premium to parity because of the jump risk. It's equivalent to holding an option over an earnings announcement. The RUT settlement is very jumpy. You have 2000 stocks, most of which are listed. The RUT can spike 10 to 15 handles on average over spot. In 2008 RUT spiked over 80 handles on two occasions. Yes, 80 handles!!!!!!!

So if you are short cash going into exp you have two choices, either buy back your options at a HEFTY premium or gamble on the SET which could be a huge spike against you. And there is no way to hedge settlement. In fact, hedging only adds additional risk because there is very little correlation to SET and the underlying.

i agree on the settlement risk on the rut if a trader was to hold positions until expiration. with etf's, its risky too, you would then be long or short on the following monday and then you can also have one of those major moves as well, no?