.sigma's butterfly book

[.sigma]

I've been spraying and praying flies all over the market for the past year, messing around with all alterations and iterations of the beautiful butterfly play.

Of course the great riskarbatticusdestrieroconvexxdonpruf opened my eyes to the potentials of fly trading. I trade other strategies like verticals, jade lizards, occasionally calendars, but haven't gone beyond that. No double diagonals, no risk reversals, no back-ratios, no reverse collars. I'll eventually grasp those alterations but for now I'm focusing mostly on butterflys.

So heres the deal. At this stage in my life I've been trading options since I was 23, I started studying derivatives when I was 21-22, I am 30 now. Ive had a hiatus in between that time but I've always and always will have a passion for the markets. I remember not understanding the butterfly strategy. And by no means am I saying I understand it, but I definitely have a better grasp of the mechanics now.

Although I would love to trade more advanced one day, for now I do not determine my trades BASED off of volatility metrics.
Yes I do look at vol metrics, and the numbers do have an effect on my positioning, but its not the determinant.

I studied market profile years back, and volume profile, Peter Steidlmayer's work. The overall foundation of market structure, auction theory, the push and pull/ebb and flow of supply and demand from all market participants from short term scalpers to long term investors. Since then I've adapted a form of this thinking into how I trade butterflies and I'll explain throughout this journal how I do this.

I'll add more colour laterz.

 

[gaussian]

I studied market profile years back, and volume profile, Peter Steidlmayer's work. The overall foundation of market structure, auction theory, the push and pull/ebb and flow of supply and demand from all market participants from short term scalpers to long term investors. Since then I've adapted a form of this thinking into how I trade butterflies and I'll explain throughout this journal how I do this.

How are you going to handle getting GOOD data for market profile? For example, the DOM is basically useless as any meaningful amount of trading is going to be happening through dark pools or icebergs. Will this effect your market profile?

 

[FriskyCat]

A couple of things I'd be interested in:

1) Do you leg verticals or just fill a fly combination order?
2) Do you trade index call flies differently than index put flies due to the skew on the put side?
3) Do you trade near expirations or 60,90 days out?

 

[.sigma]

DOM?

gauss, I should've been more clear, I don't directly use MP. I do use Volume Profile though, but its more of a gauge which gives me some bias.

I brought up MP because it taught me some invaluable concepts about the structure of markets. And I've always kept that with me.

I look at the chart of an underlying and start to dissect it.

I'm mainly focused on price and time, and how price reacts over time.

I want to know the volatility characteristics.

Once the arithmetical mean is established i'll calculate the data to arrive at vol numbers below and above spot. These numbers are similar to pivot points, ACD values. I am also learning ACD currently so I'll be looking to incorporate that method with my fly strategy as well.

These pivot points will oscillate around VBP (volume by price) bars that I'll use to position my flies within the channeled band. I'll look at ATR, IV, HV, IVPercentile, IV Rank to determine if I''ll choose a natural 121 (132/231 if prompted), or an iron.

I'll get into more details as we proceed.

 

[easymon1]

 

[.sigma]

A couple of things I'd be interested in:

1) Do you leg verticals or just fill a fly combination order?
2) Do you trade index call flies differently than index put flies due to the skew on the put side?
3) Do you trade near expirations or 60,90 days out?

Hey Frisk,

1. Filled as a single order, although I want to try legging into verticals. This is something I'll look into further.
2. I haven't traded index flies in awhile, but I normally choose put flies but that's just my preference, theres no difference inherently between the calls/puts of a fly, sometimes microstructure preferences if a call or put is better.

I read you always want a flat put curve, and a steep call curve, when trading iron flies.
Lets say the .10(d1)put in the SPX trades at 140% premia to ATM IV. So if ATM IV is 20%, that 10Delta put will be about 28%, one could structure an iron to take advantage. I've never traded this way, but I definitely want to use the implied-space to trade.

3. All of my trades are within <30DTE, mostly pure gamma, some vega convexity.
I'm usually putting these trades on the weekly expirations. So really <15D

 

[.sigma]

View attachment 223880

nice hat! #bucket

 

[ffs1001]

@.sigma , it would be good to see a trade with details of entry prices etc.

Happy trading

 

[.sigma]

@.sigma , it would be good to see a trade with details of entry prices etc.

Happy trading

When I have some time I’m going to outline my trades from this week then starting this weekend I’ll outline any potential trades I’m thinking about entering for next week.

Glad you replied ffs, I’ve read your journals on butterflies and intrigued. Please add any colour about fly spreads in this thread if you want.

 

[.sigma]

The markets are a flux of expected distributions of future prices on assets. Price action inherently oscillates the way it does because price is mimicking the human mentation of fear/greed simultaneously.

This flow of money into underlying provides liquidity and facilitates the buyers and sellers transactions. Its the liquid underlyings I'm focusing on (although there is opportunity in illiquid cheap stocks sometimes) and its the stochastic process in which price moves around that has always intrigued my brain.

I'm focused on price and time. I'm also focused on volume by price. Using metrics I've acquired over the years I'll trade butterfly spreads, mostly in single-names.

The famous bell-curve is apparent in almost every instrument of trade.

Just look, and you'll see it. Volume floods into the instrument has specific prices that buyers/sellers think deems important (for the time being), until another price is breached and now the NEW norm (mean).

While price fluctuates around these important/significant price levels it forms the shape of a normal distribution, although not perfect, and most of the time looks log-normal/Poisson. Price might (and will) deviate from the "mean", and move higher/lower, but "eventually" price will creep back to this flooded area of buyers and sellers.

Its the kurtosis I'm really focused on. The peakedness of the distribution, thus I'll be mostly trading butterflies ATM, although I will experiment with OTM flies for binary wagers on paper as well. I'm just experimenting for the time being before I jump in live.