.sigma's butterfly book

[.sigma]

3/27/20

To get this journal started, I'll be posting trades from this week.

$AMD

$AMD was around $47/share when I entered this trade. As you can see the DOM (VVA) is around that price, thus I set up this:

BOT +1 121 PUT FLY $AMD 3 APR 20 (Weeklys) 40/46/51 @ 1.46

$AMD then drifted lower to around $42 a share, moving outside of the Volume Value Area, but still within my OTM wing. Premiums are pumping.

I'm going to start logging the IV numbers when I enter a fly and exit, log these numbers down, to see if I can find anything worth looking into as far as volatility. I have many ideas when it comes to volatility (broadly speaking) and term structure trades. Maybe I'll trade some TS with some calendars, but I want to keep this thread strictly butterflies and all the variations of it.

 

[.sigma]

Interesting the similarities and distinctions between butterfly spreads and butterflies (insect).

Number of species (insect): Due to their bright colors and visits to flowers, butterflies are the most familiar insect to humans. There are about 17,500 species of butterflies in the world.

Number of species (optionality): Butterfly spreads come in various structures. 121's, 132's, 231's, 143's, broken-wing's, iron's, OTM pin's, etc etc etc.

Distinctive characteristics (insect): Butterflies are the only group of insects that have scales covering their wings, although some butterflies have reduced scales. They differ from other insects also by their ability to coil up their proboscis.

Distinctive characteristics (optionality): Butterflies are a way to play the distribution of an underlying with great odds, use of buying power, and many other things. Flies have low-greek magnitude across the curve, giving the fly room to create opportune to profit. You can use a fly trimodally, structuring for the third moment of the terminal distribution. Two verticals in symbiosis creates the risk profile of a butterfly. Similar to catapillars (bull vertical) in the cacoon (bear vertical) eventually metamorphosed into a beautiful butterfly.

Plant associations (insect): Butterflies are commonly associated with plants, and the relationship is sometimes complex. Butterflies are important for cross-pollination of flowers.

Bimodial tree (optionality): Butterfly spreads are associated with the underlying asset its attached to, which derives its value on option model metrics. Butterflies are important for cross-strike hedging other positions (usually spot).

Migration (insect): Butterfly migration is best exemplified by the Monarch, which is widely known to migrate in the fall to overwintering sites in California and Mexico.

Migration/Oscillation (optionality): Butterfly spreads are usually entered at-the-money. But throughout the duration of the contract life the butterfly will flutter around the flower (spot) and hover to see where exactly on the flower it wants to pollinate (expire/pin). As the fly moves around, lets say spot is under the short strike, delta is now positive. When spot is above the short strike (body) of the fly delta becomes more negative.

Okay enough lol yes I was bored.

Cheers!

 

[.sigma]

 

[BeautifulStranger]

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.

Ah ha!

Thank you.

 

[.sigma]

 

[.sigma]

3/30/20

I entered $NVDA. This underlying has been fruitful for me, and its usually one of the higher moving butterflies in my arsenal obviously because of the price of it, but also the vol.

Although the VVA is around $247, I structured this 121 at $260. Which was around ATM at the time of initiating this trade last week. I closed this trade for a profit of $5.61 on Friday.

 

[.sigma]

Last Tuesday I entered a 121 put fly in $VXX.

I plotted the VVA on my chart, structured the fly 10-width. Profit of $2.66.

 

[.sigma]

Current Open Positions:

I will update later tonight on potential flies I'll be entering this week. I'll also update when I close these current flies and provide more colour on these.

 

[.sigma]

 

[.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?

Also about legging into flies. I'm not too sure to go about this.

For example, if I'm thinking of setting up an iron butterfly, and plan to leg in would I sell the ATM straddle first? Then buy the OTM strangle? Does it depend on current IV of the strikes in choosing which leg in to order entry into?

If we're talking natural 121's would you first buy the long call spread? Then sell the short call spread? Or vice versa? Or neither? Instead just sell the two ATM calls, then leg the wings? Of course if you sell uncovered your margin is way different.. And someone like me doesn't sell naked ever.. I should read RA combo to fly conversion thread again! But I'm curious what have you guys done or think about legging flies?