Multiple long butterflies into earnings (goog)

S

scriabinop23

Let me preface this: I'm very long goog right now via outright May and Apr calls, but want to get my strategy balanced before earnings, so either IV or a large adverse directional move doesn't kill me. I'm taking a very concentrated position. A mixture of in the money, and heavier position of out of the money (480-500 May, 440-460, 490 Apr) calls.

So my thought would be to somehow get paid on lack of movement just in case. I devised the three relatively low cost spreads below to cover me in the following ratios:

1x Apr 430/460/490 call spread.

2x Apr 480/500/520 call spread.

2x Apr 390/420/450 put spread.

Of course these butterflies are short the middle legs -2x, and long the wings 1x.

These spreads have weak points, but are positioned to benefit from touches of key resistance and support. The first spread obviously has the highest cost, thus the ratio of 1x purchase ratio to the other spreads. But this cost is offset of course by probability of success.

I figure the put side will cover me quite nicely in case we get a negative surprise. Of course, one could argue even adding a 430/440/450 put spread (very low cost) might be an even better high probability failure hedge bet in case of an earnings failure. At the put spreads' weak spot of 450, it overlaps the highest cost call spread (430/460/490) enough where the call spread profits will make up for its losses.

Any ideas here? Anyone like? Dislike? Any thoughts on using these butterflies as a 'financing method' to allay risk from going outright out of the money further month calls?
 
Personally, I think that creating a 9-leg hedge is bit too much. The slippage alone would kill ya on this.
 
Quote from showyouwang:

I agree.. it's a bit excessive. Why not just buy some puts and turn it into a long strangle/straddle
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Buying butterflies is a method of selling straddles with defined risk. so its exact opposite as you suggest. Thats my intent at least.

My idea here is to keep a long strangle on the back months and try to profit on either a disappointment or no movement to offset my losses in the rear month long options.


once again the search for a holy grail. but in this case, where there are so many strikes with relatively tight spreads, and a minimal holding time (one day before earnings and expiration), this seems like a unique opportunity.

my game plan may be to buy the out of the money butterflies (cheap with narrower strikes) earlier in the weak, and buy the final wide butterfly near the end of earnings day (so if we are at 500 already on a runup, I didn't end up wasting 10.00 of premium on a 430/460/490 spread).

I've reconsidered my strikes. Here is my current idea [assuming the stock doesn't move much this week]:

this is all april.
seems excessive, but these things are dirt cheap.

430/440/450 put spread (+1/-2/+1) x2
410/430/450 put spread (+1/-2/+1) x2
480/500/520 call (+1/-2/+1) x2
430/460/490 call (+1/-2/+1) x1

and finally, cap the position off with a shitload of long 490 may calls. i really am blurred by my view by lack of potential downside on the stock (considering valuation), so I don't even think its worth buying May puts below support [430/440]. I figure I'm covered enough on the put spreads from 420-440 strike range.

fundamentally as you see, my butterflies are neutral to bearish (short IV or weighed to profit on disappointment) in focus, while my outright calls are my power punch.
 
Quote from scriabinop23:

Buying butterflies is a method of selling straddles with defined risk. so its exact opposite as you suggest. Thats my intent at least.

My idea here is to keep a long strangle on the back months and try to profit on either a disappointment or no movement to offset my losses in the rear month long options.


once again the search for a holy grail. but in this case, where there are so many strikes with relatively tight spreads, and a minimal holding time (one day before earnings and expiration), this seems like a unique opportunity.

my game plan may be to buy the out of the money butterflies (cheap with narrower strikes) earlier in the weak, and buy the final wide butterfly near the end of earnings day (so if we are at 500 already on a runup, I didn't end up wasting 10.00 of premium on a 430/460/490 spread).

I've reconsidered my strikes. Here is my current idea [assuming the stock doesn't move much this week]:

this is all april.
seems excessive, but these things are dirt cheap.

430/440/450 put spread (+1/-2/+1) x2
410/430/450 put spread (+1/-2/+1) x2
480/500/520 call (+1/-2/+1) x2
430/460/490 call (+1/-2/+1) x1

and finally, cap the position off with a shitload of long 490 may calls. i really am blurred by my view by lack of potential downside on the stock (considering valuation), so I don't even think its worth buying May puts below support [430/440]. I figure I'm covered enough on the put spreads from 420-440 strike range.

fundamentally as you see, my butterflies are neutral to bearish (short IV or weighed to profit on disappointment) in focus, while my outright calls are my power punch.
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12-leg hedge:confused:......'nuf said.
 
Quote from scriabinop23:

have you ever tried it?
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As I said, the slippage is just way too much. I prefer the KISS method. There is no position that will cover all possible outcomes, which is seemingly what you are trying to achieve.
 
Quote from MTE:

As I said, the slippage is just way too much. I prefer the KISS method. There is no position that will cover all possible outcomes, which is seemingly what you are trying to achieve.
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you know what - you're right.
i charted this out,and the returns are minimal. with a variety of combinations, returns average 1:1 except a few focused price points.

not worth the effort. just better off maybe buying one butterfly at most along with my outright long calls.

nonetheless, a worthwhile exercise at the drawing board.
 
Quote from IV_Trader:

Long GOOG vols and use YHOO's (17th) and AMZN ( 18th) reports for gamma scalping.
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if you don't mind, can you explain this procedurally? ie example of buy GOOG 2x 470 call, short 100 GOOG stock. Then at 471, short 10 shares more goog stock. Then 470, cover 10 shares. At 469, sell 10 shares, etc.

Whats a practical increment? Every $2?

PS: I found this:

http://learning.saxobank.com/forex/options/gamma_scalping.aspx


I assume you only intra day this method, since you can't appropriately hedge gaps in gamma.
 
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