Riskarb's combo to fly conversion journal

Suppose I implement Riskarb strategy in IRA. I will need to create Iron butterfly instead. Assume that I use very wide wings first, wait until vol collapse, and buy closer wing later. Would this work out almost the same ?

My limit understaning of greeks told me that the wing price itself has even higher vol than the body so when vol collapse, the vol of the wings my collapse more than the body which may offset any edge I might have.

Thanks
Nick
 
Nick,

See here for discussion between Phil and myself on doing it the other way around:

http://www.elitetrader.com/vb/showthread.php?s=&postid=971436#post971436

If you intend to buy the wings first then you really want IV to subsequently increase so that you can then sell the body.

What you have suggested will not be favorable and will also require you to fight the decay of the wings whilst you wait for the IV activity. Phil has suggested timing it around earnings troughs etc. which may yield good results.

If you pursue that then it's really a different strategy altogether. IMHO, it's better to just put on natural flies than to try and get clever legging in to one if you are unable to go naked straddles. Besides, butterflies are great and it's arguably the same candidates that one should be looking at to employ this strategy. All this is doing differently is trying to reduce the cost of attaining the butterfly.

Suggest you have a word with Donna who also looked at implementing this strategy in an IRA.

MoMoney.

Quote from skanan:

Suppose I implement Riskarb strategy in IRA. I will need to create Iron butterfly instead. Assume that I use very wide wings first, wait until vol collapse, and buy closer wing later. Would this work out almost the same ?

My limit understaning of greeks told me that the wing price itself has even higher vol than the body so when vol collapse, the vol of the wings my collapse more than the body which may offset any edge I might have.

Thanks
Nick
More...
 
Mo,

I'm afraid I don't make myself clear. Let's see if Donna want to jump in. Here is my example

xyz at 200, sell IB

150/200/250

Wait till IV come down or decay kicking in as Riskarb said.

Now convert to narrow fly.

190/200/210.

My concern is to overpaid for $150 put and $250 call. That is the thing I have to give up versus start with sell straddle 200 and buy 190 put, 210 call later.

It's still Riskarb method but modified for IRA.

-Nick
 
So you're buying 6-8 sigma wings for teenies to maintain a covered status for your IRA. Then you proceed to buy the 190/210 strangle if/when the body and "new" wing strikes allow for a profitable conversion. In essence you're selling a naked straddle and paying teenies for the edge in trading tax-deferred.

You'd need to earn the outlay on the wide wing-strike debit in addition to any gains in the body strike, or narrow-wing opportunity. In any case, it's a small price to pay.

Excellent!
 
Is it just me or was Excellent the only word I understood from the post LOL.

If risk says it is excellent then I will have to read it a few times and get it!!!!!

EDIT: Actually I think I follow, you are selling the straddle and just buying deep deep OTM options so it is not a naked posiiton and then rolling into the FLY like we are doing. You just are subtracting the cost of the DEEP OTM options to the straddle proceeds and that is the small price to pay to be able to do this in an IRA.

Did I get it?
 
Nick...I did ok with CME but I purchased the stock...THEN sold 1 straddle. Later bought back the put rather than putting on the wing as that gave me 80%profit..I closed out the call and I guess made some money on that...its kinda half-assed do-able in an IRA but not as efficient as what RA is doing. Also it was NOT a shotgun approach but a stock I had pretty good confidence in the direction.

Quote from skanan:

Mo,

I'm afraid I don't make myself clear. Let's see if Donna want to jump in. Here is my example

xyz at 200, sell IB

150/200/250

Wait till IV come down or decay kicking in as Riskarb said.

Now convert to narrow fly.

190/200/210.

My concern is to overpaid for $150 put and $250 call. That is the thing I have to give up versus start with sell straddle 200 and buy 190 put, 210 call later.

It's still Riskarb method but modified for IRA.

-Nick
More...
 
Yes coach. I'm glad to hear "Excellent" from riskarb. Actually, I did not think about tax deferred at all. Thanks for pointing that out. I just want to get around the restriction of IRA. My non IRA account does not have much money to trade.

This trade made me realize that I really need to read more books. I was in the gym reading Natenberg book and now understand more of what you guys try to do. Also I was able to answer some of my own question.

If Vol drop, the percentage of price change on those wings is much bigger than the percentage of price change on the body. However, the dollar change on the body is bigger than the wing.

I priced ACL using TOS software, and assume paying at ask and selling at bid. ACL is $122.90
Feb: Buy 105 put 20 cent, sell 120 call $5.3, sell 120 put $2.35. Buy $145 for 20 cent.

If vol drop 700bp next day and ACL does not change value.

105 put 5 cent, 120 call $5, 120 put $1.35, 145 call 5 cent. Profit on straddle is $80, loss on strangle is $30-$40.

So I have to pay about $30-$40/contract to participate in IRA account for ACL.
 
I charted a real-life example for current QQQQ prices. QQQQ at $41.1, iron butterflies 37/41/45 vs. 40/41/42. As expected, the 37/41/45 will do better when IV drops, and when the price is narrow range bound. Both are the assumptions under which you'd put on such a position.

I think that there's actually no advantage to convert the 37/41/45 into 40/41/42. If you expect QQQQ to move toward the edges of the profitable price range is better to close the position, if you expect to stay in the middle of this range it's better to keep the wider butterfly. I understand the "getting into positive expectancy" argument, but ... it's a good chance to happen what happened (so far) to optioncoach's ISRG position.
Quote from skanan:

Mo,

I'm afraid I don't make myself clear. Let's see if Donna want to jump in. Here is my example

xyz at 200, sell IB

150/200/250

Wait till IV come down or decay kicking in as Riskarb said.

Now convert to narrow fly.

190/200/210.

My concern is to overpaid for $150 put and $250 call. That is the thing I have to give up versus start with sell straddle 200 and buy 190 put, 210 call later.

It's still Riskarb method but modified for IRA.

-Nick
More...
 

Attachments

Yeah, looks like it. You could buy the furthest out strangle listed to avoid being naked, though with minimum price increments you could probably get a narrower strangle for the same price.

Quote from optioncoach:

Is it just me or was Excellent the only word I understood from the post LOL.

If risk says it is excellent then I will have to read it a few times and get it!!!!!

EDIT: Actually I think I follow, you are selling the straddle and just buying deep deep OTM options so it is not a naked posiiton and then rolling into the FLY like we are doing. You just are subtracting the cost of the DEEP OTM options to the straddle proceeds and that is the small price to pay to be able to do this in an IRA.

Did I get it?
More...
 
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