Will try and be brief
Quote from chrdso:
1) What indexes do you trade butterflies on? XEO/MNX...?
XEO mostly. Occasionaly MNX or QQQQ but it's a lot harder to hold your nerve with those. Mainly I trade butterflies on individual issues where IV is higher than these indices as that makes the fly cheaper.
For other ways of reducing the cost of flies, you might be interested in Riskarb's combo to fly conversion journal here:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=62104
Alternatively, if I feel like getting cute with direction I might place a single or vertical, wait for my "prediction" to be correct, but rather than taking profits on the directional bet, convert to a less than fair value fly from there
if doing so is consistent with my directional outlook at that point. I have a propensity for adjusting/building/locking in profits when I'm right vs. just closing positions when I'm wrong.
2) When do you generally open a position (10 days before expiration)?
Anywhere up to 30 days before expiration but normally around 21 days. As you probably know, flies are cheaper the further out you go. Normally have to close the fly early in OPEX week so a 10 day fly would not yield much IMO, or rather doesn't fit my trading style. However, I'm aware that some people employ the shorter term approach with success too. You can go shorter term on individual issues.
3) How do you decide on the short/long strikes?
long strikes at support/resistence, or +- 1 1/2 std. deviation away from index price?
I don't know the first thing about support and resistance LOL except that they are there to be broken. Originally I chose long strikes based on probabilities/std. deviation in combination with a risk/reward I was after. However, these days, I just "know" what fly to go for if it is an issue I have traded before e.g. GOOG, normally 20 or 30-wide flies. XEO, 10 or 15-wide flies etc.
4) Do you sell the "baby flies", or the short options, or ......
It depends how much time I want to spend trading and how much commission I want to give my broker (4 legs at a time!) It's difficult in my experience to trade baby flies until you get close to expiration. That is the main drawback with butterflies in general: you can die of old age waiting for profits. When I do trade babies (something wrong about that statement) it's normally when I want to take money off the table and/or the underlying seems to have developed a directional bias. However, if things look decidedly sideways, then I will normally leave it alone and let the underlying bounce up and down. The effort/benefit ratio for just leaving things alone seems to be the most attractive most of the time!
5) When do you adjust the fly into a condo?
Well this is tricky. It's difficult for me to really outline the exact rules that I use to make this decision. Its' done more by intuition. Essentially it's a combination of: mental stop loss on running p/l, break-even points of original fly, time to expiration, risk/reward and probabilities of converted condor.
Andy Smith outlined a more coherent KISS approach here:
http://www.elitetrader.com/vb/showthread.php?s=&postid=904745#post904745
The butterfly strategy seems interesting. Any help you can provide is much appreciated.
Interesting
and profitable. The main drawcard for me is the tiny amounts you have at risk if you choose your candidates wisely e.g. to pique your interest, the 565/575/585 XEO fly I have on right now was done for 1:3 risk/reward three weeks ago and is currently showing
100% return on risk i.e. double money. That means I can have a position size 10 or 20 times smaller than some of our FOTM practitioners here for the same reward OR have the same position size for 10 or 20 times the reward! Of course, things have been very sideways so that helps LOL - it's not always that easy. This is a higher maintenance strategy than FOTM credit spreads so the comparison is probably not entirely fair. You can certainly combine the two and lift the entire risk profile of the fly above the line to result in a profit zone akin to a naked straddle.
So much for being brief. Good luck!
MoMoney.
. Lurk away!