"A parabola is bound by one law which fixes its relations with two straight lines at every point; yet it has no end short of infinity, and it continually changes its direction. The Initiate who is aware Who he is can always check is conduct by reference to the determinants of his curve, and calculate his past, his future, his bearings, and his proper course at any assigned moment; he can even comprehend himself as a simple idea." - Aleister Crowley
.sigma's butterfly book
- Thread starter .sigma
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Of course going wider improves winning %, but much more risk. I'm not against this, just stating easy facts. Just something to ponder.
Via tastytrade
So can anyone explain to me how market makers price their books via butterflies? I've heard of this a few times, I just heard Tom talking about it on tastytrade while I was looking up that fly spread segment. Why would they price their positions in fly spreads? Why not straddles? Or condors?
I suspect you are doing a lot more than "Spraying and praying"!
Then again, personally I feel there is much to be gained by repetition and should so this for my trading.
This post reminds me again of the idea instead of entering entire position at a single structure and point in time, it my be better from an expectancy standpoint to spread out (Pun unintentional) opening positions over several hours or days. This idea seems to make even greater sense if one tends not to pay much attention to intraday moves. As a side benefit, there is more time to work orders that provide increased liquidity versus merely trying to get filled at midpoint.
Thank you for your explanation. It is good to understand the reasoning of other people. Yes, Poopydeek is Destriero.
Reply to your post is inline, below:
=".sigma, post: 5064777, member: 514564"]How far would you go out? These are natural 10-point wide flies, with very good R:R and use of buying power.
Lets take my FB 160/170/180 for 2.72
Would you instead widen the width to say 20 points?
I don't want to sound you are necessarily making an error in the way you are structuring your trades. Certainly you are betting better RR, but at the cost of probability by being being tight. Furthermore, you may have trade management ideas before expiration for trades where prices have gone beyond your wings. I am also thinking along the ideas of "Financing costs". I see, quite possibly incorrectly, the increased amount paid for close in wings as a financing cost versus the risk/profit potential.
The 150/170/190 is currently quoted at 10.63. Which is a lot more expensive, and skews the r:r to basically 1:1.
What do you mean this pricing model is implying neg edge? Can you elaborate? And what does paying the full spread mean? Thanks.
IB's model assumes trade is held to expiration and liquidity is taken when opening the trade. IB's model accounts for skew and term structure volatility differences. I have taken trades that appeared to have negative expectation by IB, but my intention at the beginning was to close the trade before expiration. In my opinion, one absolutely needs to have their own model that accounts for changes in moneyness, volatility levels, and days until expiration. Skew and term structure assumptions are likely to be a worthwhile bonus. Some traders structure their trades to primarily take advantage of skew changes which is a less crowded trading strategy. Paying the full spread means taking the offer when initiating a a net debit position. I always try to obtain price improvement by placing my orders in between the bid/ask.
I'm pretty sure Dest didn't put on flies with wings that far out. Maybe in the index, but not single-names. I could be wrong tho.
Check out Destriero's journals just before he changed his nick. One particularly impressive play was on still new issue UBER during its earnings report. Having an understanding of the mechanics of new issues and the tendencies of the lead underwriter creates a significant edge for those in the know.
I appreciate your efforts in this journal. You have stimulated many ideas and advanced my understanding of 'Flys considerably. Some of my questions are the result of seeking clarification of what you are doing or the testing my own ideas.
Edit: By default, I like to go to .84/.16 delta or .95/.05 on my ATM 'flys. By definition, an ATM 'fly strategy assumes realized volatility will be less than implied volatility. As such, it seems .84/.16 is fine. As looked as a synthetic position seeking a lower average cost, the .95/.05 may be better.
=".sigma, post: 5064777, member: 514564"]How far would you go out? These are natural 10-point wide flies, with very good R:R and use of buying power.
Lets take my FB 160/170/180 for 2.72
Would you instead widen the width to say 20 points?
I don't want to sound you are necessarily making an error in the way you are structuring your trades. Certainly you are betting better RR, but at the cost of probability by being being tight. Furthermore, you may have trade management ideas before expiration for trades where prices have gone beyond your wings. I am also thinking along the ideas of "Financing costs". I see, quite possibly incorrectly, the increased amount paid for close in wings as a financing cost versus the risk/profit potential.
The 150/170/190 is currently quoted at 10.63. Which is a lot more expensive, and skews the r:r to basically 1:1.
What do you mean this pricing model is implying neg edge? Can you elaborate? And what does paying the full spread mean? Thanks.
IB's model assumes trade is held to expiration and liquidity is taken when opening the trade. IB's model accounts for skew and term structure volatility differences. I have taken trades that appeared to have negative expectation by IB, but my intention at the beginning was to close the trade before expiration. In my opinion, one absolutely needs to have their own model that accounts for changes in moneyness, volatility levels, and days until expiration. Skew and term structure assumptions are likely to be a worthwhile bonus. Some traders structure their trades to primarily take advantage of skew changes which is a less crowded trading strategy. Paying the full spread means taking the offer when initiating a a net debit position. I always try to obtain price improvement by placing my orders in between the bid/ask.
I'm pretty sure Dest didn't put on flies with wings that far out. Maybe in the index, but not single-names. I could be wrong tho.
Check out Destriero's journals just before he changed his nick. One particularly impressive play was on still new issue UBER during its earnings report. Having an understanding of the mechanics of new issues and the tendencies of the lead underwriter creates a significant edge for those in the know.
I appreciate your efforts in this journal. You have stimulated many ideas and advanced my understanding of 'Flys considerably. Some of my questions are the result of seeking clarification of what you are doing or the testing my own ideas.
Edit: By default, I like to go to .84/.16 delta or .95/.05 on my ATM 'flys. By definition, an ATM 'fly strategy assumes realized volatility will be less than implied volatility. As such, it seems .84/.16 is fine. As looked as a synthetic position seeking a lower average cost, the .95/.05 may be better.
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Ask homeboy why he blocked me, I can't see his posts, but I want to.. I'm a huge riskarbatticusconvexxdownprufdestreriopoopydeek fan, I'm saddened by this news.